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Trump Considers Tapping Nation’s Oil Reserve To Combat Rising Gas Prices

President Donald Trump could soon tap the Strategic Petroleum Reserve (SPR) in an effort to lower oil prices just ahead of the U.S. midterm elections in November.

President Donald Trump could soon tap the Strategic Petroleum Reserve (SPR) in an effort to lower oil prices just ahead of the U.S. midterm elections in November.

The Trump administration is considering releasing up to 30 million barrels of oil into the market, cutting the stockpile nearly in half, according to Bloomberg.

The move comes ahead of midterm congressional elections in November, as pressure mounts over high gasoline prices at the pump, which are due to rising global crude prices.

The increase in crude oil prices can be partly attributed to recent supply shortages in Libya and Canada. Analysts point to other factors, including Trump’s renewal of sanctions on Iran—a major global oil exporter—as another cause of higher prices.

In late May, rumors of a higher output from Saudi Arabia and Russia led to a crash in oil prices, and also caused speculation of another downturn. It isn’t clear if the Organization of the Petroleum Exporting Countries’ (OPEC) agreement to increase production by one million barrels per day will be enough to fill the worsening supply gap.

Congress has already mandated the sale of 11 million barrels from the SPR starting as soon as Oct. 1. A government spending bill before Congress now could also add another four million barrels to that count. But Trump has emergency authority to release up to 30 million more barrels onto the market.

The more oil prices continue to rise, the more likely it is that President Trump will decide to tap the SPR. And higher oil prices seem likely, as WTI spiked by about $8 per barrel since last week, and continues to climb.

“We are moving into an environment where supply disruptions are visible all over the world,” said Hootan Yazhari, head of frontier markets equity research at Bank of America Merrill Lynch. “Of course President Trump has been pretty active in trying to isolate Iran and getting U.S. allies not to purchase oil from Iran.”

The Trump administration has aggressively pressured Saudi Arabia to boost output to offset declines from Iran. Saudi Arabia has complied, promising to ramp up output to about 11 mb/d in July, up from less than 10 mb/d in May. It’s an astounding increase, both in terms of volume and the speed.

But it still might not be enough. Outages in Libya, Venezuela, Iran, Canada, Angola, and Kazakhstan will probably more than overwhelm the increase in supply from Saudi Arabia.

Last month, senior Iranian oil official Hossein Kazempour Ardebili urged Trump not to use the SPR to push prices lower, and instead to drop sanctions on Iran’s crude exports. This is not the first time that Iranian officials have addressed Trump regarding oil and oil prices. Last month, Kazempour said that Trump’s tweets about oil had already pushed up prices by at least $10 a barrel.

Tapping the reserve to offset lost Iranian barrels may be a legitimate use of the stockpile, but it would only provide short-term relief, according to Robert McNally, former energy advisor to President George W. Bush and the president consulting firm Rapidan Energy Group.

“Washington cannot stabilize the global oil market with the SPR,” he cautioned. “If it chooses to use the SPR to fight fundamental forces, it may win temporary, short battles, but it will lose the war.”

Analysts say supply conditions are not abnormally tight and are skeptical that a release of crude onto the market is warranted.

“In the face of disruptions that threaten world production, it makes sense to use these reserves as a matter of urgency,” says Phil Flynn, an analyst at Price Futures Group. “My fear is that the United States can begin to use them as a weapon to manipulate prices and that this weapon will become inefficient in the event of a real crisis in the market.”

Others who oppose Trump’s use of the SPR point to evidence that supply pressures already are being alleviated, notably by OPEC.

“The gas price hike that has recently hit American motorists and against which Donald Trump is fighting before the November mid-term elections is partially resolved as these prices have already fallen,” said Andrew Lebow, an associate at Commodity Research Group.

Constructed in the wake of 1970s oil shocks, the SPR is spread across four sites in Texas and Louisiana in the south of the U.S. It currently holds 660 million barrels of oil in salt caverns, meant to protect against a sudden disruption in oil supply.

U.S. politicians have historically been reluctant to draw down on stocks from the SPR. The operating principle is that the SPR is only to be used in the event of an emergency.

Major releases by the SPR have been rare and have previously been implemented in coordination with the International Energy Agency (IEA) and other member countries. In 1991, the U.S. reserve released 17 million barrels onto markets during the Desert Storm military operation led by the U.S. after Iraq invaded Kuwait. The stockpile also pumped out 11 million barrels of oil following Hurricane Katrina in 2005 and another 30 million barrels in 2011 after the overthrow of the Libyan government.

Other releases have been smaller, such as last summer, when the SPR released five million barrels following Hurricane Harvey.

The norms surrounding the SPR have eroded in the past few years, largely due to the surge in U.S. oil production. The dramatic cut in net imports, combined with the general perception of abundant supplies, has diminished the political salience of the SPR.

Depending on its size and timing, an oil sale from the SPR might leave the market unmoved, or have a real, if fleeting, impact on prices.

“When the SPR sale comes in the face of real tightness—good examples of this are Katrina, the first Gulf war—the price response is pretty dramatic even if short-lived,” according to Kevin Book, managing director of Washington-based consultancy ClearView Energy Partners.

Energy Secretary Rick Perry last week dismissed the notion of releasing oil from the SPR in response to Iran, but the decision will ultimately be the president’s. In the past, Perry and Trump have taken opposing positions on the role of the reserve, with Trump proposing to sell off half of the stockpile to cut the deficit.

It may be too early to speculate on what the administration will do, said Guy Caruso, former Energy Information Administration chief. “A big part of it would be to see what the Saudis do and, secondly, how much of the Iranian exports are actually diminished by the sanctions.”

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