THE BLOG

Why Tapping the SPR Won't Bring Down Gas Prices

03/07/2011 05:01 pm ET | Updated May 25, 2011

Recently, a whole bunch of Senators and Congressmen, most notably Senator Kirsten Gillibrand and representative Steve Israel of New York have been prodding the Obama administration to release a part of the Strategic Petroleum Reserve in order to counteract recently rising prices of crude oil and refined gasoline and heating oil.

It's an almost childish proposal in its lack of understanding of the oil markets but does a great political service to these politicians, signaling how they are 'on the side' of regular Americans getting hosed at the pumps.

Politically, the idea has merit. But from a practical viewpoint, it just won't work.

Even the most simple kitchen economist must understand that the purpose of opening the SPR is intended to release more supply -- which you would do to alleviate a supply shortage.

Behold -- the US oil supply is hardly in the midst of a shortage.

Quite the contrary, total stockpiles for the US are still more than 5 million barrels above the five year average, and global demand is just now again reaching the levels it saw in late 2005 and early 2006, when oil was just reaching above $60 a barrel, not the screaming plus $105 prices we're seeing today.

Instead of a real supply shortage driving prices higher is an unlikely but possible and very scary threat of a supply shortage, mostly from Saudi Arabia being affected by the huge number of political and economic protests exploding throughout the Middle East.

That threat is doing a fantastic job of driving money into the oil markets, first and foremost from investors looking to diversify into oil from stocks and secondly from traders who are adept at leveraging the latest investment mania to make a quick profit. As I outline in my upcoming book "Oil's Endless Bid", out from John Wiley and Sons in a few weeks, these financial forces continue to have the greatest influence over where crude and therefore gas at the pumps is being priced, totally overwhelming the true fundamental forces of supply and demand that used to control oil's price.

In response to the idea that perception, as opposed to reality is forcing prices higher, Congressman Israel responded: "Whether it's a fear factor or a specific economic reality is irrelevant to somebody paying $3.68 a gallon for gas."

Brilliant. But what good will releasing more crude supply do in a market whose price continues to already ignore storage tanks filled to the brim?

We have better examples of the futility of this idea. In 2007, OPEC agreed to 15% quota increases as oil rushed towards an unthinkable $100 a barrel. Then as now, there were few places to put the extra supply, but it hardly mattered. Prices took a week and half breather before resuming their upswing, finally reaching $147 before crashing in July of 2008.

In terms of stopping the seemingly unrelenting march of higher crude prices, we'd better think of something else -- and fast.