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Obama oil plan may weaken emergency stockpile

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.

Democratic presidential candidate Senator Barack Obama addresses the audience during a campaign stop at the Lansing Center in Lansing, Michigan August 4, 2008. REUTERS/Rebecca Cook

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.

SWAPPING LIGHT CRUDE FOR SOUR MAKE SENSE?

“You want to have light, sweet crude in the reserve for big emergencies,” Emerson said. “A lot of refiners can take that and make diesel and gasoline quickly.”

Sour crude contains more sulfur and produces less petroleum products than a barrel of sweet oil.

“Everybody can use it right away. You don’t have to be specially configured,” API’s Dougher said of refineries processing the reserve’s sweet oil.

“So, if you’re talking about taking a fourth of that (sweet oil) out, that’s conceivable it could have an impact” on the ability of the government to handle a supply problem, she said.

“Replacing it with dirtier, heavier crude oil that can be used by fewer refineries doesn’t make sense,” said Brian Kennedy, spokesman for the Institute for Energy Research, a Washington-based group that promotes freely functioning global energy markets.

The Obama campaign said it believes putting additional barrels of sour oil in the stockpile will not put the United States at a greater risk in a supply disruption.

The campaign said it considered the conclusions of a recent report by the Government Accountability Office that found several refiners have modified their facilities to handle sour crude. The GAO also said 36 refineries at risk in a supply disruption that use heavy oil could not operate at normal capacity if they ran the reserve’s lighter crude.

The experts questioned whether there was even a need to tap the reserve, given that supplies are plentiful and gasoline demand is down due to higher fuel prices and a weak economy.

“There are currently no shortages,” said the National Petrochemical and Refiners Association. The trade group opposes using the SPR “for anything other than a real supply emergency, not as a mechanism for driving markets one way or another.”

Even if refiners did not need the reserve oil, they might still take it anyway in order to export the crude. “It could go to other countries. We don’t need it right now,” Dougher said.

Reporting by Tom Doggett; Editing by Walter Bagley

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