Barack Obama's suggestion to swap existing oil in the Strategic Petroleum Reserve for a different grade of crude has its roots in the recommendations of energy economist Philip K. Verleger.
Verleger, in his speeches and in his widely-read weekly and monthly reports, has placed a significant amount of the blame for high oil prices on the once-soaring (but now sagging) price of diesel fuel.
In fact, as this blog has mentioned several times, the relationship of diesel and other middle distillates to crude and gasoline is significantly out of alignment with historic norms. But that doesn't mean it's a temporary blip. A host of factors that are not going away, such as the long-term move to diesel vehicles in Europe and the desulfurization of diesel fuel, have led to tight supplies. All of this has been exacerbated by reductions in supply out of Nigeria, which produces a light, sweet crude that is rich in diesel yield.
Verleger's argument is that it was diesel that is pulling the rest of the petroleum complex higher. So he has called for a swap of crude from the SPR, which is full of high quality light sweet crude. Put light sweet crude on to the market, the argument goes, and then put heavy crude back in. The market will have more of the type of crude it needs in a diesel-constrained world, and the SPR still has the same number of barrels that it did before. It's clear from legislative proposals made by the Democrats, and from the Obama speech, that he has found a willing audience for his proposal in at least one party.
There's another aspect to this argument that makes sense. The two most likely scenarios for a serious tapping of the SPR would be a Katrina-like loss of production from a hurricane, or a politically-driven loss of supply, with a Strait of Hormuz closure or chaos in Venezuela distinct possibilities. In the former, it might be light sweet crude that's lost; it's just too difficult to know.
But in the latter case, it would be a lot of heavy crude that would need to be replaced. A release of SPR crude under that scenario would be light sweet crude for heavy crude, which economically doesn't make sense.
That is not exactly an argument that would grab the public. Obama put it a different way: "We should sell 70 million barrels of oil from our Strategic Petroleum Reserve for less expensive crude, which in the past has lowered gas prices within two weeks.''
As we've indicated elsewhere, that is an question that could be argued at length.
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