With gasoline prices surging, politicians are facing pressure to do something — anything! — to protect consumers. Most of the suggestions offered thus far either won’t do much good or would even make matters worse. That is, with one exception: The federal government could tap into the long-dormant Strategic Oil Reserve (the SPR).
President Bush, the oil industry, and most Republicans don’t like this idea much. They argue that the SPR is there to protect us not against high oil prices (which, in fact, come and go) but against a catastrophic interruption in oil imports. They argue that using the SPR now would reduce our ability to handle potentially much bigger problems down the road and would put the U.S. government squarely into a commodity market where it doesn’t belong.
What about the bigger problems? The SPR was intended to enhance our ability to deal with embargoes. But everyone who knows anything about the oil market knows that embargoes are meaningless gestures. That’s because oil producers cannot ultimately dictate where their oil goes once it leaves their shores. Hence, during the 1973 embargo, oil that was exported to Europe was simply resold to the United States or ended up displacing non-OPEC oil that was diverted to the U.S. market. As Saudi oil minister Sheik Yamani conceded afterwards, the 1973 embargo “did not imply that we could reduce imports to the United States … the world is really just one market. So the embargo was more symbolic than anything else.”
A severe production cutback is a more plausible worry, but even that’s a stretch. No matter how anti-American OPEC producers like Iran or even Iraq under Saddam Hussein might be, they still put oil onto the world market in great volume. Without oil revenue, after all, they would have little political, military, or economic power. And autocratic regimes without power are not long for this world.
Terrorist attacks on Persian Gulf oil facilities could significantly curtail production. But such events may or may not trigger release of the SPR — the administration has been silent regarding the threshold for such release.
We agree with the second argument against use of the SPR — that government shouldn’t be involved in commodity markets. We don’t need the government to tax us in order to provide oil-price insurance. We can buy the insurance ourselves through the oil futures market. And we can buy cars and other goods that require less oil and gas to operate if we want, which is itself a form of insurance against higher prices. Government should not do for us what we are clearly able to do for ourselves.
In short, we don’t need the SPR and, in a perfect world, we’d sell off the oil here and now, and then shut the whole thing down. Oil prices would spiral downward, gasoline prices would drop, and taxpayers would receive a windfall from the sale of 650 million barrels of oil during a time of record high prices. Insurance against future price spikes (if you want it) would be up to you.
Alas, that’s probably not going to happen. So what do we do with this 650-million-barrel rainy-day fund when the rainy day we’re saving it for is probably never going to come? Well, we could define a rainy day downward and use it for times like the present.
Wouldn’t this make the federal government a major player in the oil commodity market with all the political mischief and economic mismanagement that might entail? Not if the SPR were put on autopilot and open for business 24 hours a day, seven days a week, for as long as the government held the reserve. Oil companies would be allowed the right to “borrow” as much oil from the SPR as physically possible (up to 4.4 million barrels per day, roughly the equivalent of adding another two Kuwaits to the world market) with a requirement to return it either in kind or at prevailing prices after some period with interest determined at auction. Under those conditions, the government’s ability to meddle in the market would be nonexistent.
In 2000, President Clinton authorized a similar plan, but withdrawals were limited to one million barrels per day over 30 days. The program was under political rather than market control. Even so, world crude prices dropped from $34 to $30.50 over a two-week period in late September and early October 2000.
In a perfect world, governments wouldn’t meddle in energy markets. But the world isn’t perfect and SPR exists. Political control of the inventory adds to the uncertainty and risk in crude oil markets. Allowing the market to determine how the inventory would be used would be better.