Putting Obama's energy plan to the test

Obama's proposed release of 70 million barrels of oil from the strategic reserve could lower crude prices, experts say. But the impact of his broader overhaul is less clear.

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By Aaron Smith, CNNMoney.com staff writer

Solving the energy crisis: You decide Solving the energy crisis: You decide Solving the energy crisis: You decide
As Americans grapple with record oil and gas prices, politicians facing angry voters have offered up a variety of solutions. Tell us what you think.

NEW YORK (CNNMoney.com) -- Democratic presidential candidate Barack Obama said Monday that he feels Americans' pain from rising energy costs and laid out his plan to break the country's "addiction" to oil.

Much of Obama's energy plan had been outlined before. But some of his ideas - such as tapping the Strategic Petroleum Reserve and allowing a "limited amount" of offshore drilling - were new to his campaign.

Overall, analysts welcomed Obama's plan, which included both short-term and long-term proposals. But they stressed that for the plan would need bipartisan support to succeed.

Obama said a short-term proposal, like selling crude oil from the Strategic Petroleum Reserve, "has lowered gas prices within two weeks" in the past.

For his proposed 10-year, $150 billion overhaul of the nation's energy system to get bipartisan support, he's willing to compromise on his earlier stance against offshore drilling by allowing a "limited amount" of drilling.

His proposal also includes retooling the U.S. auto industry to build more fuel-efficient cars, doubling the use of renewable resources by 2012, improving the safety and environmental impact of nuclear power and reducing the use of electricity, among other ideas.

Tapping the reserve

In order to quickly bring down the price of oil and provide relief for American drivers, Obama wants to sell 70 million barrels of crude from the SPR.

Currently, the U.S. strategic reserves stand at more than 700 million barrels of oil in giant salt caverns along the Gulf of Mexico. The reserve was established in the 1970s after the first oil embargo to provide a buffer against future disruptions. Since 2001, the Bush administration has poured 70,000 barrels a day into the reserve, with the intention of expanding it to its full capacity of 727 million barrels, and possibly expanding the reserve to 1.5 billion barrels.

Peter Beutel, an analyst with energy risk management firm Cameron Hanover, downplayed the impact that Obama's SPR release would have on oil prices. Beutel said that 70 million barrels represent only about three-and-a-half days of U.S. fuel consumption and would have a limited impact on prices, driving them down by $5 to $10 a barrel.

However, Beutel also suggests that the government could have a dramatic impact on consumer prices if it sells its oil at a substantially lower price to the refineries - in a type of deal known as a "netback."

In netback deals, the price of crude is calculated by subtracting the costs of refining, marketing, and transportation, along with profits, from the market price of the end products.

"If he sells it under a netback deal, it would fall under $100 [a barrel] very quickly, and maybe under $80," said Beutel. That kind of reduction could lead to a decline of up to 80 cents per gallon of unleaded gasoline.

Fadel Gheit, a senior energy analyst for Oppenheimer, projected a more dramatic reduction in oil prices, noting that Obama's SPR plan could "cut prices in half."

Gheit said that prior releases from the SPR during the administrations of former Presidents Bush and Clinton during the 1990s were "knock-out punches" that caused oil prices to drop dramatically. He said that to maximize the impact, which is primarily psychological, Obama should not provide hard numbers to make it harder for speculators to project future prices.

"We should not have a limit on what we will release," said Gheit. "That is the best way to keep speculators off balance."

The $150 billion plan

Analysts had a tougher time gauging the impact of Obama's sweeping proposal to overhaul the nation's reliance on non-U.S. fossil fuels by investing in alternative fuels. But they did praise the plan as a positive step forward.

"I think we need to implement everything [from Democrats and Republicans]," said Beutel of Cameron Hanover. "If we pick a plan and stick with it and devote ourselves to it for more than a headline cycle, then we're going to move forward."

Analysts agreed that the best way to overhaul energy creation and consumption in America is to not abandon the long-term plan as the situation changes in America.

"We never had an energy policy," said Gheit of Oppenheimer. "We talk about [it] when energy prices are high, but we clog the highways with SUVs when energy prices are low."

Obama's Republican rival, Sen. John McCain of Arizona, is set to discuss his energy plan on Tuesday. To top of page

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