Obama oil plan may weaken emergency stockpile

By Tom Doggett - Analysis

WASHINGTON (Reuters) - Democratic presidential candidate Barack Obama's plan to release oil from the U.S. Strategic Petroleum Reserve may lower crude and gasoline prices in the short term, but it could also leave the United States more vulnerable in a supply emergency.

Obama called this week for easing fuel prices by releasing some 70 million barrels of light, sweet crude from the nation's stockpile and swapping it for less expensive heavy, sour oil.

The hope is that putting more oil on the market will push down crude prices and those savings will be passed on to consumers at the gasoline pump.

Cheaper crude would make it more profitable for refiners to make gasoline, diesel fuel and heating oil, and encourage them to produce more of those petroleum products. The additional supplies would lower the prices for the fuels.

"Would it bring down prices initially? Sure," said Sarah Emerson, managing director of Energy Security Analysis Inc, a Massachusetts-based consulting firm. "It's more supply and the price will go down."

Obama says releasing oil from the reserve is meant to provide short-term relief for consumers, and is not a long-term solution to the nation's energy problems.

Previous oil releases from the reserve have cut fuel prices for a while.

Daniel Weiss, an energy expert at the Center for American Progress, a Washington-based think tank, points out that when the Bush administration tapped the stockpile in September 2005, after Hurricane Katrina disrupted petroleum supplies, the resulting drop in gasoline prices saved the average American family $125 over 100 days.

IMMEDIATE RELIEF, BUT TEMPORARY

Releasing oil "in our overflowing government stockpile will immediately lower gasoline prices for American families," Weiss said.

Rayola Dougher, senior economic advisor at the American Petroleum Institute, an industry group, said whatever effect the move may have on the price of gasoline, it would only be temporary. "It's just hard to judge," he said. "Would it be a few cents? Would it be a nickel, a dime, 20 cents?"

The national price for gasoline is at an 11-week low of $3.88 gallon. Every $1 drop in the price of a barrel of oil equals a 2.4-cent savings in a gallon of gasoline, experts say.

The reserve was created by Congress in the mid 1970s after the Arab oil embargo. It holds 707 million barrels of crude at four underground storage sites in Texas and Louisiana -- 424 million barrels of sour oil and 283 million barrels of sweet crude.

Obama would require oil companies taking the 70 million barrels of expensive sweet crude to replace them with more barrels of heavy, sour oil, because light, sweet oil is worth more. So the government would get more sour crude for every barrel of sweet it swapped, boosting the size of the reserve.

However, experts warn that, with less sweet oil in the reserve, it may be more difficult for the United States to counter a major disruption in petroleum supplies, like the one caused by Hurricane Katrina. Or that could happen if a big foreign oil supplier cut off shipments to the U.S. market.