A Ridiculous Idea, Now Backed by Policy

 | Mar 13, 2014 | 10:33 AM EDT  | Comments
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It is with incredible equanimity that the media has digested the announcement of a 5-million-barrel "test" release from the strategic petroleum reserve (SPR) on Wednesday. But the market certainly hasn't: West Texas Intermediate crude plummeted by $2.30 per barrel on the news.

It doesn't take much analysis to see that this is a weak attempt to flex some muscle, using the U.S. energy boom as a wedge against Russian energy influence in Ukraine and the rest of Eastern Europe.

A ridiculous meme has gained traction in the last week and a half from mostly GOP leaders in Washington -- the suggestion that the U.S. "drill everywhere" and begin exporting natural gas into Europe. This is a silly idea I've debunked several times this week, both in columns and on air, but now this fantasy has gotten support from real policy in the White House in this latest SPR release.

To put this in context, the last SPR release was in 2011. That came in response to a coordinated support of rebels in Libya, offsetting the 1 million barrels a day of lost Libyan supply caused by the war. Before that, the SPR was used in the aftermath of Hurricane Katrina and before that, during Desert Storm in 1991. The pattern is clear: The strategic petroleum reserve was designed to be used in the national interest during moments of extreme market stress. That is why this release is being falsely called a "test" by the Energy Department.

Test, nothing -- this is President Obama looking to act tough and give credence to a wrongheaded and just plain wrong idea that the U.S. energy boom can in any way be used to deter Russian influence throughout their old satellite states and into Eastern Europe and the European Union.

Natural gas is where Russia holds its iron fist. In states such as Finland, Latvia, Poland, Hungary, Romania and even in Turkey, a vast majority of the natural gas comes from Russia, with most of that gas flowing through Ukrainian pipes. This amounts to a stranglehold of energy supply that no politics can overcome. Russia has shown the will and ability to change political minds using the spigot in 2006 and 2009. It is perhaps an even more persuasive tactic than troop placements can be.

U.S. exports of liquid natural gas to loosen Russia's grip on Eastern Europe is a laughable idea, requiring fresh and fast build-outs of incredibly uneconomic and impractical export facilities that no energy company would ever in its right mind undertake. But even that dumb idea might be trumped by the miniscule impact the planned SPR release will have. The planned 5 million barrels of sour crude represent less than one-quarter of what the U.S. uses every single day, although the threats of further SPR releases can have a destabilizing effect on oil markets.

Those effects, furthermore, are to the detriment of U.S. energy companies -- not the Russians. WTI crude may have taken a hit in trading yesterday, but Brent barely budged, and is still trading close to $108 a barrel. The only influence that the SPR release is going to remove is that from the shareholders of U.S.-based exploration-and-production names like EOG Resources (EOG), Pioneer Natural Resources (PXD), Continental Resources (CLR), Anadarko Petroleum (APC), Noble Energy (NBL) and so many more.

Just file this under "really bad energy policy ideas" -- and take it as proof that, if you talk about them long enough, they somehow seem like good ones. My list for these bad policy choices continues to grow, but this latest idea of an SPR release is one that is already boomeranging. My advice to the Energy Department is to should scrap this idea of a "test" release. We already know the taps work.

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