With gasoline and home heating oil prices continuing to shoot skyward, President Clinton decided late last week to flood the market with federally stockpiled oil from the Strategic Petroleum Reserve. The SPR holds 582 million barrels of unrefined crude oil, a stock large enough to replace 37 percent of oil imports for 90 days. Clinton's right: It's time to pump that oil into the marketplace.
The main objection is that the reserve should remain untouched in case of an embargo or other supply disruption. Tapping the reserve, Republicans argue, would compromise our national security by making us more vulnerable to OPEC in general and Saddam Hussein in particular. Nonsense. First, let's quit worrying about an embargo. The 1973 embargo -- the seminal event that still haunts American energy policy -- failed to keep a single drop of OPEC oil out of U.S. ports. That's because once OPEC puts oil into the world market, it can't control what happens to it. All that happened in 1973 was a somewhat costly reshuffling of supply lines.
Nor should we be unduly worried about what an oil shortage might mean for our military during some future crisis. In 1995, Joshua Gotbaum, then an assistant secretary for economic security at the Department of Defense, testified before the Senate that the military could fight two major regional wars simultaneously while using only one-eighth of America's current domestic oil production.
The fear that Iraq might shut down production to punish the United States is equally far-fetched. Saddam wants to sell oil on the world market -- it's the only source of revenue for the Iraqi economy and, thus, the Iraqi military. The only threat to the availability of Iraqi oil is a U.N. embargo on Iraqi oil exports, an embargo strongly supported, ironically enough, by the U.S. government.
Since there's no national security rationale for the SPR, we might as well put those 582 million barrels to productive use. Opening up the SPR might well break inflationary expectations regarding future price (expectations that seem responsible for at least $5 of the present cost of a barrel of oil) and add enough new oil to the market to drop the world price a bit for the time being.
But we can't be sure. When governments try to manipulate currency markets by increasing or decreasing the supply of money, they often find that what looks good in theory fails to translate into higher or lower currency prices. In both currency and oil markets, government reserves are so small in relation to the size of the market that such interventions are not guaranteed to work.
Moreover, crude oil prices are only one cause of high gasoline and home heating oil prices. The other factor is tight refining capacity. Even if the United States were flooded with oil tomorrow, there's nothing we could do with it for now because domestic refineries are already operating at full capacity.
But even if releasing the SPR is effective at manipulating domestic prices, using it this way sets a dangerous precedent. The idea that government should be in the business of wholesaling important commodities is the path to economic ruin. That's why we should open up the reserves, drain them as fast as possible, and shut down the reserve permanently.
The SPR is a bad economic investment. It costs a tremendous amount of money to maintain a physical reserve of oil. A back-of-the-envelope calculation finds that, after adjusting for inflation, stashing away the oil in the SPR for a rainy day has cost taxpayers about $60 a barrel. Rainy days can and do occur, but even at today's prices, the SPR represents an insurance policy that's more costly than the disaster being insured against.
Still, Clinton's plan is hard to fathom. Instead of selling off all the reserves while prices are high (returning $15 billion to $20 billion for the federal treasury), the administration will loan the oil to companies -- which they can sell on the open market -- and require them to return the borrowed oil to the reserve at some later date. They get to sell high now, buy low later, and face little or no downside risk.
If there's an argument to be made against the administration's proposal, that's it.