A New Political Football Being Kicked Around

May 28, 2004 • Commentary
This article appeared in Business Times of Singapore on May 28, 2004.

With their eyes on voters, the Democrats and Republicans are arguing about whether the US Strategic Petroleum Reserve should be tapped

With the petrol price in the United States reaching more than US$2 a gallon and oil trading over US$41 a barrel, the Bush administration is facing growing pressure on Capitol Hill and elsewhere to help lower pump prices by drawing down on the American strategic petroleum reserve.

But the White House is defending the plan to fill the US Strategic Petroleum Reserve (SPR), arguing that diversions would have little impact on prices while leaving America vulnerable in the event of a major disruption in oil supplies.

Democrats in Congress have already proposed last week a resolution asking the White House to release one million barrels per day (bpd) from the reserve for 30 days as a way of helping the American consumer, aka American voter, who will have to decide in November whether the Republicans should remain in control of the White House as well as of the Senate and the House of Representatives.

Representative Edward Markey, a leading Democrat on the House Energy and Commerce Committee, said: ‘Right now, consumers are getting turned upside down and having money shaken out of their pockets by Opec and the big oil companies, and the Bush administration won’t lift a finger to help them.’

But President George W Bush and his aides insist that the SPR was created by Congress in the 1970s in response to the Arab oil embargo and as a policy tool to address possible energy supply disruptions and not to control prices.

The reserve on Louisiana’s Gulf Coast now holds close to 660 million barrels and absent a severe energy supply interruption, the administration will continue to take delivery of oil for the SPR as it becomes contractually due and plans to increase it to 700 million barrels next year.

The Democrats are arguing that a release of oil from the reserve will be a signal to the Organisation of Petroleum Exporting Countries cartel that the US will do what it takes to knock down oil prices. Their message to the voters seems to be that America needs a strong and tough president who will stand up not only to Arab terrorists but also to the Arab oil producers.

And they sense that oil prices and the SPR provide them with an opportunity to highlight an issue on which Bush is vulnerable — the alleged economic and political ties between the Bush family and their business partners to the oil companies and the oil‐​producing regimes in the Middle East.

Buddy politics

Indeed, at a time when the best‐​seller list of the New York Times includes such titles as The House of Bush, House of Saud: The Secret Relationship Between The World’s Two Most Powerful Dynasties, by journalist Craig Unger, the Democrats hope to persuade the American voters that the Bushies’ refusal to use the SPR and other tools to force oil prices down stems from a reluctance to antagonise their Saudi and oil‐​business pals.

Indeed, Democratic presidential candidate John Kerry, issued a statement last week, accusing the Bush administration of doing nothing to combat rising gasoline prices. ‘It’s not good enough to assume that this crisis will fix itself,’ Kerry said. ‘The country needs the president to do his job and come up with a real plan to address this crisis (and) you really need to scratch your head as to why the White House has failed to do that so far.’

And Kerry seems to imply that if you scratch your head many times, the next image will show up: the Bushies, the Saudis and their Texas Cronies giving each other the high five, while you suckers have to pay higher and higher prices to drive your cars to work and pick up your kids from school.

‘Where is the president?’ Kerry asked at a campaign stop in the American West, where gas prices are at their highest. ‘We need a president who is fighting for the American worker, the American family at the fuel pump.’

And Terry McAuliffe, the Democratic Party’s national chairman, said last week that Bush was ‘in the pocket of big oil’ and that he has reneged on a pledge he made in 2000 to ‘jawbone’ Middle East countries into keeping oil prices low. ‘Four years later, they haven’t heard a peep from the president,’ McAuliffe said.

Swapping oil for votes

White House aides and Republicans have been shooting back at the Democrats. They accuse them of swapping oil for votes and blame them for the rising oil prices after they stalled a comprehensive energy bill in Congress that could would reduce US dependence on foreign oil and bring petrol prices down.

Ironically, the last time the SPR was opened was in 2000, when President Bill Clinton approved releasing one million barrels of oil a day for 30 days when petrol prices had risen, as a way to help Vice‐​President Al Gore improve his chances in winning the race to the White House against Republican George W Bush.

In any case, most energy analysts are sceptical that the use of the SPR would have much impact on oil and petrol prices, that have been driven up by speculators concerned about fears of future supply disruption because of the uncertainties in the Middle East, including the stability of the Saudi regime, and rising oil demand by China.

Jerry Taylor and Peter Van Doren, oil market experts at the Cato Institute, a Washington‐​based free market‐​oriented think tank, stressed in a recent policy paper that their main opposition to the creation and use of the SPR reflects their view that the government should not be involved in commodity markets.

‘We don’t need the government to tax us in order to provide oil price insurance,’ they say. ‘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 the American consumers what they are clearly able to do for themselves, they insist. In short, according to Taylor and Van Doren, Americans don’t need the SPR and, in a perfect world, they should sell off the reserve 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. Hence, in a perfect world, governments wouldn’t meddle in energy markets.

But as Taylor and Van Doren note, ‘the world isn’t perfect and the SPR exists’. So what do Americans do with this 650‐​million‐​barrel rainy‐​day fund?

The two pro‐​business analysts propose a free market solution in which the SPR would be put on auto‐​pilot and be 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,’ they write.

Under those conditions, the government’s ability to meddle in the market would be non‐​existent and the market would end up determining how the inventory would be used.

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