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What happens if the US tap into its oil reserves?



  OPEC agrees to boost oil production

President Donald Trump did not shy away from his aversion to high oil prices. But apart from angry tweets, he can not do much about it.

Unlike the leaders in the Middle East, Trump can not simply order American oil companies to pump more oil. West Texas is already producing so much crude that there are no more pipelines.

The biggest lever Trump can pull is the release of oil from the Strategic Petroleum Reserve, the world's largest supply of emergency oil. The government resorted to this option last summer to address the refinery failures caused by Hurricane Harvey.

Although analysts doubt that the development of emergency reserves is now justified, speculation in the oil markets is growing louder and louder that Trump will do just that to combat the high gas prices ahead of November's midterm elections.

"Nothing gets the attention of congressmen and presidents of all parties more than rising gasoline prices," said Joseph McMonigle, senior energy policy analyst at Hedgeye Potomac Research.

Oil prices fell sharply earlier in the month after the Wall Street Journal reported that the United States was considering joining forces with other Western countries to create oil reserves at the same time. The Energy Department declined to comment on the report.

But prices could rise again as tensions between the US and Iran continue to heat up. On Sunday, Trump sent a fiery tweet warning Iranian President Hassan Rouhani that all threats would end in dire consequences.

Related: Texas to pass Iraq and Iran into oil production

No supply bottleneck

The strategic reserve is a complex of four locations along the Gulf of Mexico, which have deep underground storage caverns. It contains about 660 million barrels of crude oil. It should be used in emergencies such as hurricanes or wartime, but the president can open it as his discretion.

Despite the conflict with Iran, McMonigle believes that no emergency oil release is imminent.

"If you do it for political reasons, you should make it closer to the election itself," said McMonigle, who served as chief of staff at the Department of Energy in the early 2000s.

Presidents tapped the SPR for non-emergency reasons. The Obama administration released about 30 million barrels of crude oil in June 201

1. The Department of Energy was concerned that supply disruptions in Libya and Elsweh would threaten global economic recovery.

But using the reserves would now "leave little ammunition down the road when a real emergency arises," said Jason Bordoff, director of Columbia University's Global Energy Policy Center and a former energy official in the Obama administration.

The government can replenish the SPR over and over again, but that costs money – and takes the supply off the market.

"If there were a layoff prior to the midterm elections, it would seem to be political in nature, as there is no supply shortage," said Matt Smith, director of exploration at ClipperData.

The Department of Energy did not immediately respond to a request for comment.

Related: Trade War Threatens America's Booming Oil Exports

"No Long-Term Solution"

A potential threat to the oil market is an interruption of the oil market Supply from Iran.

Sanctions could destroy up to 1.5 million barrels of crude a day from Iran, the fifth largest producer in the world.

Concerns over the government's harsh stance on Iran helped raise US oil prices to $ 75 a barrel in early July. They have since retreated to about $ 68.

Crude's comeback has caused a bit of pain at the pump. The national average price of gasoline is $ 2.84 per gallon, up from $ 2.28 a year ago, according to AAA.

But releasing oil reserves is unlikely to cut prices for a long time. Refineries in the United States are already working near their capacity. In other words, they have little room to convert more oil to gasoline.

"It would work temporarily, but it's not a long-term solution," says Michael Wittner, global head of oil research at Societe Generale.

Iran threatens critical oil shortage

Recent days have shown that Trump's campaign against Iran runs counter to his goal of keeping oil and gas affordable.

Iran has vowed to answer Trump's efforts to wipe out oil exports to the country through sanctions.

The Iranian leaders warned this month that they could react by disrupting the Strait of Hormuz, a critical oil shortage. More than a third of global oil trade flows through the Strait of Hormuz, according to estimates by the US government.

Although blocking the oil flow from the Strait of Hormuz would be a drastic step, analysts are finding that Iran has a history of harassing US naval vessels in the region.

"The war is not imminent, but the likelihood of an escalation event in the Strait of Hormuz is increasing," wrote Cliff Kupchan, chairman of Eurasia Group, to clients.

CNNMoney (New York) First published on July 25, 2018: 12:01 ET


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