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According to the Bush Administration, the Strategic Petroleum Reserve is to be used in case of national emergency or supply disruption, not to interfere with the free workings of the market.
But that stipulation presupposes the market for oil is free and working, which it is not, given the collusion of the OPEC cartel. It is a rigged market. Stubbornly unwilling to recognize this fact, the Administration has misused the SPR either willfully or through gross mismanagement to support ever-rising prices.
In last year’s State of the Union address, President Bush called for the doubling of the SPR, even as oil prices tumbled toward $50 a barrel and talk of $40 and even $30 oil was thick on the airwaves. Presto, almost immediately after his speech, the price stabilized and began its rocket-like ascent to $100 a barrel. The President’s announcement gave OPEC the green light to push prices to whatever level it saw fit.
Then, instead of sending a message that the upward movement of prices was too steep, the Energy Dept. continued to fill the SPR no matter how high the ascent. With prices “barreling” past $90 a barrel, Energy Secretary Samuel W. Bodman boldly announced on Nov. 8—just days before the meeting of OPEC heads of state—that the U.S. would release no oil from the SPR to curb prices and that an additional 12 million barrels would be added to the stockpile in January—as if it were summertime in Jamaica.
We should have received instead an announcement that, at current prices, we are not making additions to the SPR and if prices go higher, we would consider this an economic emergency and make releases of heating and crude oil to the U.S. marketplace through the winter. OPEC took into consideration Bodman’s remarks and did nothing at its scheduled meeting, and the price of oil marched on to touch $100 a barrel on Jan. 2.
With the U.S. going into a recession, many economists feel the country needs a stimulus package of $300 billion to $400 billion to ensure a rebound in economic growth. It is a sum the government cannot really afford. Yet the jump in the price of oil from $50 a barrel since the President’s speech a year ago to near $100 a barrel is costing U.S. consumers an additional $1 billion dollars a day, or some $350 billion a year—a sum that otherwise would have gone a long way toward stabilizing the economy.
To formulate today’s actions in relation to the Strategic Petroleum Reserve, we should look back on a lesson learned from the 2005 hurricane season.
A combination of government action and inaction mitigated the effect of hurricanes on the price of oil and its by-products. The International Energy Agency’s release of the 60 million barrels from its petroleum reserve and that of its members, including the U.S.—and the suspension of specific environmental regulations in the U.S.—contributed to increased supplies. These actions also increased U.S. gasoline imports and put downward pressure on crude and by-product prices. At the same time, federal and state governments rejected calls for price controls and direct intervention in pricing. This “inaction” allowed market forces to work.
In 2005, releasing some of the reserve made sense. In 2008, it doesn’t. The U.S. Strategic Petroleum Reserve was established for use in case of emergency and supply disruptions, not for manipulating markets and influencing prices. In an election year, any use of the SPR would strike many citizens as politically motivated.
Because the U.S. has no real shortages today, the release would weaken the country’s ability to respond to legitimate crises. Deployment would jeopardize national security in case of a supply disruption.
A release would also violate U.S. principles of free markets and free trade—and contradict the U.S. policy of promoting free markets in China and Russia. The oil industry does not want to see a repeat of the 1970s disaster, when the government intervened in the oil markets.
Furthermore, deployment will not solve problems in the products markets caused by limited refinery capacity. U.S. refineries are operating near full capacity and cannot function at 100% without creating a safety hazard. Crude oil from the SPR will back up other oils and fail to increase the availability of heating oil for the coming winter.
If refiners expect the government to keep interfering until prices decrease, they will refrain from purchasing crude now, waiting until prices decline. This will exacerbate the situation by reducing supplies and increasing prices in the gasoline and heating oil markets. In this case, the release of the SPR will lead to the opposite of the intended results.
Tapping the SPR could also compel OPEC to retaliate and cut production. Such cuts could eliminate any effect the SPR may have on oil prices. Finally, the use of the SPR will reduce privately held reserves (commercial stocks), which may cause higher prices in the future.Opinions and conclusions expressed in the BusinessWeek.com Debate Room do not necessarily reflect the views of BusinessWeek, BusinessWeek.com, or The McGraw-Hill Companies.
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