In 1973, in response to the economic pressure of a depreciating dollar and angered by Richard Nixon’s decision to arm Israel, OPEC raised the price of its exported oil by 75%. The next day, production quotas were cut by five percent, with additional five percent cuts planned for the future. The Organization of Arab Petroleum Exporting Countries then decided to stop all shipments to the United States. The price of oil rose four hundred percent in a matter of a few months, and actual physical shortages resulted – and gas stations not only jacked up prices, but some actually had no gasoline to sell at any price.
Price shocks can be dealt with. They tend to be temporary, but painful. But an actual shortage is a different matter. When there’s no oil to turn into gasoline, there’s no substitute. So Congress created the Strategic Petroleum Reserve – a series of underground caverns which is filled by the US government with oil purchased on the open market. The purpose of it is simple – buy oil while the price is low, and when a shortage happens, the government can sell it to refineries to keep the American economy afloat until the shortage can be closed.
By International Energy Agency requirement, the SPR should hold 90 days worth of import replacements. It now holds roughly 75 days and is near capacity. In other words, we cannot store enough oil, as the SPR is now structured, to get us through a short-term interruption in oil supplies. But 75 days is better than nothing.
Senator Bob Menendez is suggesting that President Obama sell 50 million barrels of oil from the SPR. That would cut our ability to deal with supply shortages to just less than 70 days. With the Middle East aflame with the fires of change, now would be the wrong time to reduce our ability to do this. If anything, we should increase our insulation from market interruptions, not reduce them.
His reasoning is sympathetic. The price of a gallon of gas has risen by thirty-five cents in the last month, and following supply-and-demand principles, the release should help. Except that fifty million barrels of oil isn’t really enough to impact world oil prices and we aren’t actually facing any supply problems. In fact, oil economists doubt the ability of SPR releases to impact oil prices at all, because oil producers can easily reduce production enough to keep prices high. When the Clinton Administration released thirty million barrels from the SPR in 2000 lowered world oil prices by roughly a dollar-thirty per barrel. Gasoline prices didn’t change much at all – from $1.50 when the release began to $1.52 when the release ended a month later, and $1.52 a month later (remember complaining about $1.50 gas?).
The Senator’s other oil-related proposals show a remarkable misunderstanding of oil markets. For example, he wants to prohibit American oil exports – which sounds fine, except that some of those exports go to Canada and Mexico and the Bahamas to be refined and then re-imported. If we stop the exports, we won’t have enough gasoline in our pumps to fill our cars – and would raise the price we pay at the pump. Not only that, but the lack of competition in the market would allow domestic prices to artificially rise higher than market demand – which would raise prices at the pump.
The Senator also wants to end “tax breaks” to oil companies. Which I am fine with, but increasing the cost of production will only raise prices at the pump. Honestly, Exxon-Mobil isn’t going to swallow a tax increase and do nothing about it.
Furthermore, any profits from selling SPR oil, if it is done, should go to expanding the storage capacity and filling it to the 90 day mark. While using the funds to “invest in strategies to lower gas prices” sounds good, the fact is that no such strategy exists, and especially not in the short term. The concept of using cheap oil in storage to reduce the deficit so we can then fill up storage with more expensive oil should be a non-starter.
Here’s an idea – keep the SPR oil for what it was intended. The run-up in oil prices is largely caused by the uncertainty in Libya. If we wan’t to do the world a favor, let’s help put an end to that mess. Then oil prices will stabilize.
But it’s going to be an expensive summer for travel. There’s no way around that. No amount of electric cars or investment in future tech is going to save us from the folly of becoming entirely dependent on people such as Muammar Gaddafi to maintain our economic health. Anyone who lived through the 1970s should have a gut-level understanding of that.