Oil stock draw is not a good idea
President Obama today decided to draw down 30 million barrels of the Strategic Petroleum Reserve (SPR), the White House claims in response to disruption of oil supplies from Libya.
For those of us who developed the policies governing coordinated stock drawdown more than 25 years ago (I was the U.S. representative to the emergency committee of the International Energy Agency from 1984 to 1987), this is an odd decision, even if it is allegedly paired with drawdown of an additional 30 million barrels by other members of the IEA and an apparent Saudi decision earlier this month to increase production. Having others contribute is nice, but only if they contribute to a good cause.
The oil market is not in crisis–in fact the price has generally declined for the past month, and supplies are ample. To some, the decision seems aimed to lower prices and deter speculators (with corresponding political benefits) rather than to respond to an emergency.
Internationally coordinated drawdowns have occurred previously in response to the Gulf crisis of 1990-91 and Hurricane Katrina in 2005. Those seem far more appropriate occasions than the present to use “the nation’s first line of defense against an interruption in petroleum supplies.” The onset of the summer driving season seems to have precipitated this decision rather than any emergency in the oil market. If it was not a good idea to use the SPR in March, it is not a good idea now, when oil market conditions are calmer.
None of us like to pay more for gasoline. But the plain fact is that Americans pay relatively little, because we tax gas far less than most other developed countries. That would be fine, except for the real costs of using gasoline and other oil products that are not paid by consumers. Oil supplies are a major reason we have all those bases around the world and aircraft carriers in every major ocean. Who pays for American efforts to protect oil supplies? The general taxpayer, not the gasoline consumer. The price is on the order of $1 per barrel, which is essentially a subsidy to oil consumption.
Lowering the price of gasoline encourages consumption, increases the costs of ensuring security of supply and discourages domestic production (which I hasten to add is not a short-term solution anyway). Not the right direction. American politics don’t allow any of our elected leaders to say what they all know is true: the right long-term direction for oil prices is up, with the additional “rent” captured by taxes that return to the Federal budget the costs of protecting oil supplies worldwide. That way the price increase doesn’t go to our adversaries (or our already well-compensated friends).
It’s a good thing I’m not planning to run for office.
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The oil market may not be in crisis, but our economy is, and they’re running out of options. If high oil prices are acting as a drag, lowering them makes sense, in the short term, and we have to get through the short term if there’s going to be a long term to worry about. (A long term in which we start manufacturing the technologies that will cut hydrocarbon use, of course.) The Saudis weren’t able to push through increased production by OPEC to lower the price and boost Western economies, so we have to do it ourselves, with a little help from our friends. With any luck, the producers will start calculating that low prices for no more oil than they’re putting out now is a losing proposition. Or they can wait for panic to set in and hope for governments to be forced to halt withdrawals and for prices to start rising again. We’re clearly in a game of chicken here. Our best hope – although the Saudis could probably wait us out, a lot of OPEC countries need that monthly check. Or maybe I’ve just drunk too much Kool-Aid?
One bad feature – this is going to make it easier for politicians in the future to use the oil reserves to improve economic indicators before elections. It’s not such a bad thing that people are nervous about the idea of using them now.