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Potential Strategic Petroleum Reserve release

Hydrocarbon Engineering,

The White House is toying with the idea of releasing stock from the Strategic Petroleum Reserve (SPR) for the second time this year. A withdrawal was considered earlier this year as a counter measure to the oil embargo on Iran. The primary concern this time is rising gasoline prices in a slowly recovering economy as well as the added concern of the impact of Hurricane Isaac on the US energy infrastructure.

The SPR was established as a tool to protect the US economy by providing it with strategic economic protection against crude oil supply disruptions. Since its inception in 1991 during the first Gulf War, only two withdrawals have been made. The first after Hurricane Katrina in 2005 and the second in June 2011 during the Libyan Civil War. After the 2005 withdrawal domestic US gasoline prices fell by US$ 0.90 and returned to pre withdrawal levels in months. The second time around the price only dropped by US$ 0.70 and returned to pre levels in a matter of weeks.

 On three separate occasions over the last four years, the price for regular gasoline in the US has reached the current level. In July 2008 due to the worst economic slowdown in decades, prices fell dramatically even though OPEC slashed its market output. Since February 2011 the price has averaged between US$ 3.30 and 3.90 per gal.

At the moment US crude inventories are hovering about the five year average. Monthly US gasoline stocks are also in line with the monthly average for August. The basic fundamentals do not suggest that an SPR withdrawal is required.

The rise in oil prices and therefore retail gasoline prices is inevitable. The global economy is still struggling and crude prices are on track to reach a record high for 2012. As far as China is concerned, a slow year means 9.1% annual GDP, three times that US GDP on a good year. Chinese crude consumption is at heights never reached before and is only expected to accelerate as the global economic slump ends.

Speculation does influence oil prices, however, prices only tend to temporarily increase before correcting quickly. In the short term prices may rise and fall, however in the long run prices are up. Current monetary policy is only accelerating trends and devaluing the US dollar whilst inflating commodity prices. It is inevitable that crude oil prices will continue to rise until an alternative source of energy is introduced.

Adapted from press release by Claira Lloyd.

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