Storm could turn on Obama if oil stocks are released

A sitting American president does not normally welcome a storm tearing through the Gulf of Mexico. But in Barack Obama's case, Hurricane Isaac may give valuable cover for a move desired for political reasons, writes Robin Mills.

Oil storage containers in Louisiana lie partially submerged in flood waters after Hurricane Isaac. Sean Gardner / Reuters

A sitting American president does not normally welcome a storm tearing through the Gulf of Mexico.

But in Barack Obama's case, Hurricane Isaac may give valuable cover for a move desired for political reasons. Disruption caused by the storm could be a convenient excuse for a release of strategic oil stocks - a release not justified by market logic.

Petrol prices in the United States have been rising steadily towards US$4 per gallon, reaching $3.82 on Thursday.

This was partly blamed on Isaac, which shut down about 12 per cent of US refining capacity; and a massive explosion at Venezuela's largest refinery, Amuay. A small amount of oil was loaned to one refinery to cover disruptions.

But Isaac, a category 1 storm, was nothing like as strong as 2005's infamous Katrina, a category 3 hurricane that inundated New Orleans and drove oil prices to record highs.

The US oil industry has changed dramatically since then. Inland oil production is rising sharply because of shale oil developments, so offshore output and imports via the Gulf of Mexico are less important. And refinery utilisation is low because of falling domestic demand, giving more back-up if some plants are shut down.

The blame for high prices lies much more with global demand, which although tepid is still rising, and with sanctions on Iran.

Iranian exports seem to have recovered slightly last month, but are still only about half of normal levels as customers attempt to work around bans on insurance, shipping and financial transactions. Just as energetically, the US seeks to block loopholes.

The statement from the G7 finance ministers last Wednesday read: "The current rise in oil prices reflects geopolitical concerns and certain supply disruptions. We encourage oil- producing countries to increase their output to meet demand, while drawing prudently on excess capacity." This implicitly blames Saudi Arabia and other Arabian Gulf countries for failing to keep their side of the bargain - to increase production sufficiently to offset losses from Iran and hold prices below $100 per barrel.

With Brent oil prices reaching $113, the US has been pushing harder for emergency oil stocks to be brought into use. But the International Energy Agency (IEA) is reluctant, as are Germany and Italy.

It is important for Mr Obama to avert a damaging spike in petrol prices before November's election.

Keeping prices down also helps to encourage wavering US allies to continue enforcing sanctions. But strategic stocks are a dangerous tool. There is no obvious supply disruption - losses from Iran are inflicted by the US itself, and in any case mainly compensated by other Opec members.

The IEA considers the release during last year's Libyan revolution a success. But that crisis was short-lived.

The situation now is different. Who knows how long the Iran crisis may drag on?

Conversely, if the US anticipates war with Iran soon, strategic stocks should be held back, not squandered early. Its Strategic Petroleum Reserve (SPR) could replace total US imports only for about 100 days.

The SPR was designed as an emergency buffer, not a tool for market management.

If used routinely to reduce temporarily high prices, commercial storage will simply adjust and companies will hold lower inventory, rendering the SPR redundant. And, because the rules for emergency release are not clear, ad-hoc use exacerbates volatility in prices.

The Republicans must be pleased with this outcome. They can attack Mr Obama over high petrol prices and weakening economic confidence. Simultaneously, they can bash him for being "soft" on Iran, when the very sanctions they have enthusiastically championed, and he has implemented, have caused these high prices.

Robin Mills is the head of consulting at Manaar Energy, and the author of The Myth of the Oil Crisis and Capturing Carbon.