Posted on Friday, March 16th, 2012
First published in the ODAC Newsletter 16 March 2012.
Finally, a plausible explanation for the Obama-Cameron political orgy – ‘love-in’ doesn’t quite do it – in Washington this week. For Cameron the benefit of this floorshow was obvious – like Blair with Bush, revelling in the reflected glory of US power – but Obama’s motive remained a mystery. What could possibly justify gifting all that diplomatic folderol and face time with the world’s most powerful man? Yesterday we got the answer: international cover for a politically motivated release from strategic petroleum reserves, that’s what.
Rising gasoline prices are the biggest threat to Obama’s re-election, and he is under intense pressure from Republican candidates seeking to pin the blame on him. They’re wrong of course – drilling the US into a pin-cushion would do nothing to calm the international oil price – as Obama himself has argued forcefully. But it’s election year and he still desperately needs to engineer a cut in fuel prices. It might look less like a cynical U-turn forced on him by his opponents if he could drum up some friendly diplomatic cover.
No deal has been done, as both camps were keen to stress, and a four dollar tumble in the oil price on the news of their talks quickly evaporated. But it all looks designed to increase pressure on the International Energy Agency – the US is its biggest funder – to co-ordinate a stock release. The IEA insists it only does so to deal with a genuine physical shortage, not to massage prices, but many suspect US political priorities played a part in the release last year during the Libyan revolution.
Obama must be desperate though, because there is no evidence that such stock releases have a significant or lasting impact on fuel prices. The price of Brent crude when the stock release was announced last year was $112, and when it finished, $115.
How could it possibly make a serious difference when all countries are pumping flat out and global spare capacity is wafer thin? The world’s remaining spare capacity is now concentrated in Saudi Arabia, and both the Saudi oil minister Ali Naimi and the IEA have recently confirmed there is even less of it available than previously thought.
Saudi is pumping at around 10 million barrels per day – higher than for thirty years – and claims nameplate capacity of 12.5 mb/d. However, Ali Naimi recently admitted that 700 kb/d could not be brought on stream in less than 90 days, three times longer than the standard definition of spare capacity.
The IEA this week cut its estimate of Saudi capacity to 11.88 mb/d, because of the depletion of existing fields, and of global spare capacity to 3 mb/d. That’s back to levels seen in 2008 when the oil price peaked at $147 per barrel and – with the help of Lehman Brothers – tipped the world into the deepest recession since WWII. Peak oil promises more of the same – repeated oil price spikes and serial recessions modeled on the internet age: www.
In such a tight oil market, the effects of a release from strategic petroleum reserves would be transient at best. With the Iranian crisis looking like it may turn military, it would also be foolish: wiser to save the SPR ‘big bazooka’ for a real emergency.
This article first appeared in the ODAC Newsletter 16 March 2012.