Tapping oil stockpiles a risky proposition for governments

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Four governments are considering releasing oil from their emergency stockpiles to temper high fuel prices, but it may be the wrong time to turn on those taps.

The discussions, reportedly among the United States, Britain, France and Japan, have more to do with politics than pocketbooks, observers say, and the impact of such a move would be short-lived. Key, too, is that their emergency supplies, meant to relieve stress during oil shocks, would be depleted, a risky proposition as Iran threatens to choke off exports.

News that the governments are mulling whether to pump crude into their domestic markets sent prices down Wednesday. Oil has been trading around $105 (U.S.) in North America and $125 in Europe. Both traded at more than $140 in the summer of 2008.

Pending elections on both sides of the Atlantic are playing into the idea, observers believe.

President Barack Obama, facing a November election, is taking heat over gasoline prices, which climbed to an average of $3.918 a U.S. gallon (about 3.78 litres) for regular grade this week, according to the U.S. Energy Information Administration. French President Nicolas Sarkozy, whose fate will be decided in May, is also scrambling to convince voters he deserves another mandate.

"If we see a release of strategic stockpiles in the United States, it will be more related to the presidential election – higher gas prices is something the electorate doesn't like," said Craig Alexander, chief economist at Toronto-Dominion Bank. "There are a lot of governments around the world that are coming up for elections."

Proponents of releasing oil from the stockpiles argue high crude prices hurt the global economic recovery, therefore adding to supplies will help stabilize markets. The question, however, is whether releasing reserves will be enough to bolster struggling economies.

"The price of crude oil is elevated. It is having an impact in terms of dampening global growth," Mr. Alexander said. "But the impact that it is having is … a couple of tenths of a percentage point. We're not talking about something that is having a huge impact and creating an enormous risk at the moment."

Further, if the world's major economies deplete their cushion, they will be at greater risk. Iran continues to threaten to cut exports and block the Strait of Hormuz, a narrow passage through which 20 per cent of the world's oil travels. Observers argue the world's oil reserves should be saved for a crisis such as a major move by Iran, which would cause a disruption, and that today's economic woes are not worthy of such treatment.

"Once you spend that weapon, you don't have it later on," said Avery Shenfeld, chief economist at CIBC World Markets Inc. "And then at some point, you put additional pressure on the market as you rebuild the stockpile."

Should rich, powerful countries dip into their reserves now, Canadian energy companies are unlikely to take a serious hit. While the price of oil may temporarily fall following a release from the stockpiles, observers do not expect that would last.

Oil would have to drop to around $60 per barrel – and stay there – before Canadian oil companies would suffer.

"There's no way all the stockpiles the U.K. and France have is going to do this," said Todd Hirsch, an economist at ATB Financial. "I don't see any sort of longer-term negative impact for Alberta producers. … And if [the countries]deplete their stockpiles, even that has to run out at a certain point. There's not enough there to permanently reduce oil prices."

Scotia Capital economists noted the U.S. released oil from its reserves in June, 2011, prompting West Texas Intermediate crude to drop by $2 per barrel, then retracing to $100.

"There it remained throughout July until the combination of the European crisis, U.S. budget ceiling wrangling, slower China economic growth, and significant Q2 2011 economic underperformance formed a quadruple-whammy for markets, causing U.S. equities as well as crude prices to fall rapidly and meaningfully over the subsequent 6 weeks," the research note said.