COLUMN-U.S. could go it alone with oil release: John Kemp

Fri Aug 31, 2012 7:14pm IST

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By John Kemp

LONDON Aug 31 (Reuters) - With Italy and Germany continuing to resist the release of oil from emergency stockpiles, attention will turn to the possibility of a unilateral release by the United States, possibly in conjunction with allies like Britain and France.

The symbolism of a multilateral release would clearly be preferable for the White House since it would maximise the impact on global oil markets and limit criticism that the president is manipulating oil prices to help his re-election campaign.

But the size of U.S. stocks ensures the threat to go it alone is credible, and may give U.S. officials leverage to bring other members of the International Energy Agency (IEA) on board if the Obama administration decides to push for a release.

Even if they refuse, the president has broad authority under U.S. law to go ahead alone or in conjunction with a few allies.

GIANT STOCKS

The United States accounts for nearly half of all emergency stocks held by the 28 members of the IEA. At the end of June, the U.S. Strategic Petroleum Reserve (SPR) contained 696 million barrels of crude, just over 45 percent of the total strategic stocks of 1.537 billion barrels held across the OECD.

In the most recent emergency action, in June 2011, the United States accounted for half of all the stock offered to the market -- and substantially more than half of the stock actually sold.

The SPR offered 30 million barrels, received bids for 60 million, and ended up selling just over 30 million. Other IEA members theoretically made 30 million barrels available to the market, but in practice sold much less.

Germany offered 285,000 tonnes of crude, 142,000 tonnes of gasoline and 142,000 of gasoil, through a combination of allocations and public tenders, but only 62 percent of the released volume was actually taken up by the market.

In Belgium, 95,000 barrels of jet fuel was offered and sold. But of the 702,000 barrels of gasoline, gasoil and fuel oil made available, only 24,000 barrels was actually cut from strategic stocks.

Part of the problem was pricing. The SPR accepted small but significant discounts to ensure its target allocation was sold. In contrast, some stock holding organisations in Europe insisted on trying to sell crude and products at market prices. Since there was no actual shortage of physical barrels the attempt drew few bids.

The other problem stems from differences in the way emergency stocks are organised and released. In the United States, strategic stocks are owned and stored by the federal government. The government invites tenders and accepts the most competitive bids, accepting enough of a discount to ensure all the target volume is actually sold.

But in many European countries, stocks are owned and stored by refiners and distributors to comply with legal obligations imposed by governments. In many cases, the "release" of emergency stocks took the form of a (temporary) reduction in legal stock holding obligations. For example, Spain cut the stock holding obligation by the equivalent of 2.3 days worth of consumption/sales. Belgium cut its stock holding obligation by three days.

But there was often no obligation actually to sell the oil. In many cases strategic stocks were simply transformed into commercial ones with no sale transaction, no transfer of ownership, no movement and no impact on prices.

SPR PURPOSE

The U.S. president has broad legal authority to order the release of oil from the SPR. The law governing stock releases is set out in Chapter 77, Title 42 of the U.S. Code ().

The law contemplates a wide range of economic, foreign policy and security factors which might give rise to the need to release emergency stocks.

When the reserve was established in 1975, lawmakers declared: "Congress finds that the storage of substantial quantities of petroleum products will diminish the vulnerability of the United States to the effects of a severe energy supply interruption, and provide limited protection from the short-term consequences of interruptions in supplies of petroleum products."

"It is the policy of the United States to provide for the creation of a Strategic Petroleum Reserve for the storage of up to 1 billion barrels of petroleum products to reduce the impact of disruptions in supplies of petroleum products, to carry out obligations of the United States under the international energy program, and for other purposes." (42 USC 77 6231)

The law makes clear that the reserve may be used unilaterally as well as to meet international commitments to the IEA.

LEGAL AUTHORITY

The president's authority to order a release is set out in section 6241. The president may order a release in the event of "a severe energy supply interruption" or to meet "obligations of the United States under the international energy program". Again the law highlights the president's dual power to order releases unilaterally as well as part of a coordinated international effort.

There are three legal routes by which the president may order a release:

(1) Before the president can order a release, he must determine that there is a severe energy supply shortage which: (A) is or is likely to be of significant scope and duration; (B) may cause a major adverse impact on national safety or the national economy; and (C) results or is likely to result from an interruption in the supply of imported or domestic petroleum products, an act of sabotage or an act of God (42 USC 77 6202(8)).

(2) Alternatively the president must certify that: (A) an emergency situation exists and there is a significant reduction in supply which is of significant scope and duration; (B) a severe rise in the price of petroleum products has resulted from such emergency situation; and (C) the price increase is likely to cause a major adverse impact on the national economy (42 USC 77 6241(d)(2)).

(3) The president may order a more limited release of no more than 30 million barrels if he determines some other situation exists that: (A) constitutes or is likely to become a domestic or international energy supply shortage; (B) action would assist directly and significantly in preventing or reducing the adverse impact; and (C) the secretary of defence has found that action will not impair national security (42 USC 77 6241(h)(1)).

BROAD DISCRETION

Many analysts claim the SPR was set up to deal exclusively with physical shortages, such as those caused by war or an embargo. But the law clearly contemplates a much wider range of circumstances for employing reserves. It explicitly envisages using them to counter not just physical shortages but also threats to the national economy from a sharp rise in prices.

In each case the trigger for a reserve release is a mix of physical and economic factors. And the physical factors are set out in quite general terms so there is little restriction on the president's discretion.

The president need certify only that there is "a severe energy supply shortage" or even just "a domestic or international energy supply shortage" to order a release. Both are quite unspecific and the latter threshold (for authorising the release of up to 30 million barrels) is very low.

In the event that the White House determines that rising prices are a threat to the economy, the president has plenty of legal cover to order a unilateral release, whether or not the IEA and other countries agree a shortage exists, and whether or not they agree on coordinated action.

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