Roll Out the Oil Reserve

Now that oil has hit $100 a barrel, the U.S. government should deploy the Strategic Petroleum Reserve to reduce the price. Pro or con?

Pro: Bloated Supply

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.

Con: Wrong Case Scenario

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.

Reader Comments

Ed

Good points both pro and con. I do agree, though, that filling the reserve should have been done while oil was cheap, rather than $90 a barrel.

I still can't fathom how oil was priced at $5 a barrel 10 years ago and $90 now. Are there 18 times as many cars on the road?

logic

Quite honestly, the name "Strategic" in SPR ought to answer this question. This is an emergency oil source, in case something happened such as an Al-Qaeda led coup in Saudi Arabia or war with Iran and oil tankers being sunk left and right by Iran's hypersonic Sunburn missiles. In other words, the SPR is intended to buffer against a genuine emergency, not prices that we don't like.

Tom

The pro argument is about actions by the Administration that may have something to do with the cost of oil. I did not read any argument that constitutes an emergency or supply interruption. Today, oil still flows, and tankers still sail. Any release now can only be justified because we don't like the price at the pump.

As for the con, it accurately focuses on refinery capacity as a factor few talk about. America needs to decide on its priorities. Blue skies, green grass, and no new refineries--or cheap gas, some pollution, and new refineries. You could release every drop from the SPR, but if refineries can't process any faster, prices will go nowhere. As for the comment by Ed, don't forget China as the new oil guzzler; its growth and thirst in the last 10 years have skyrocketed.

Liz Bossley

Governments aren't good at markets. The prospect of OPEC's intervening when prices get too low and the U.S. or the IEA intervening when they get too high is a recipe for increased volatility, not stability within an acceptable range. Even if they get the direction of their interventions right, the timing will be wrong. The only "right" price for oil is the one determined by the sum of the activities of buyers and sellers in the market.

random

The high price of oil has to do with oil companies taking down their refineries for months at a time and operating the few they have at 80% to 90% capacity. Combined with the skyrocketing demands of China and India, political rumblings in major OPEC nations of Venezuela, Iran, and Nigeria, war in Iraq, the specter of terrorism, nationalization of oil supplies in South America, and pure, unabashed market speculation of commodities traders, oil is becoming harder and harder to get and thus more expensive per barrel. Releasing the strategic reserve doesn't resolve any of these issues or even lessen them.

Boosting the SPR with $90 a barrel oil was probably motivated by fears of terrorism and the Administration's intent to continue its confrontation with Iran, which could disrupt the flow of oil even more than it's disrupted now. As world tensions keep growing, it would be unwise to use the SPR to only temporarily relieve prices at the pump.

Personally, I see oil north of $100 per barrel as the perfect opportunity to wean ourselves off oil. We've been using it since ancient times and are clearly outgrowing its potential with our demands. Time for something new and something better. And we should not forget that many fabulously wealthy sheiks and emirs plow a good portion of their oil profits into terrorist outfits. Why don't we invest a few hundred billion into making all electric technology live up to its promise? It's good for military strategy, it's good for national security, it's good for our wallets and thus our economy, it's better for the environment, and it helps de-fang terrorist organizations.

Khaldoun

I agree with Dr. Alhajji:
1) It's a strategic reserve and not a tool for the government to interfere with the free market.
2) The U.S. has had refining capacity issues for a while now. We should all recall paying more for gas at the pump because refineries were in short supply.
3) It's economics if the SPR is used. There would be an OPEC reaction as well as a move to reduce purchase orders by refiners, as Dr. Alhajji said.
4) Isn't it time we came to the conclusion that oil prices were artificially too low and the new realities of the world economy and demand of natural resources make it clear that we should have responded many decades ago? After all, there is a cost to depleting a nonrenewable natural resource. It's a fact, and sticking our heads in the sand to ignore it apparently did not work.
5) Higher oil prices are not all bad. There will be a tremendous move on the part of most technology industries to produce viable energy-efficient products, from lights to cars and airplanes.
6) Let's not forget Mother Nature. Perhaps this is the only way we actually end up respecting the environment rather than pretending that we do.

Jim Williams

The September, 2000, SPR release is my favorite example. Under this "time exchange," oil companies received oil that had to be paid back plus an additional percentage. The interesting point is that it had minimal impact on prices. Oil imports were lower by a volume close to that of the release, and companies in the exchange faced a profit without risk in the transaction. The futures market was in strong backwardation, and it was only necessary to purchase a futures contract for oil coinciding with the time to return the oil. That guaranteed a profit even with the additional oil required under terms of repayment.

By the November, 2000, election, oil prices were higher than at the time of the announcement of the program.

Antonio P.B. Sarmento

It should be taken into consideration that the U.S. SPR is not limited to the stocks held in the U.S. territory but that the production available in Mexico and Venezuela are also accountable therefor. Despite minor political adversities and animosity of isolated leaderships, the U.S. may always count on the solidarity of the eastern Americas market. And why not? The U.S. will stay for a long time ahead the only deterrent in the North and South American continents against terrorism, and it is a known fact, irrespective of some local politicians' willingness to accept it or not.

James Grieme

The use of the SPR would be nothing more than a knee-jerk reaction to a problem that has its very foundation in greed. We are facing $100-a-barrel oil because of speculation and a consumer mentality that believes it is a God-given right to drive vehicles that get only 12 miles to the gallon. The release of any of the SPR wouldn't even ripple the proverbial pond.

Dean

I see that both sides have great points. However, I think there are a lot of factors that are not being discussed. We are heading into a recession. The world economy depends on the U.S. as the major purchaser of goods. We are about to see a world recession if changes aren't made.

What is causing the current recession? People can speculate all they want, but the bottom line is that oil prices are the cause. Every item bought or sold in the U.S. (including services) has been affected. I spend about $2,000 a year more on gas for my vehicles than a couple of years ago. That money is not used to support U.S. goods. Most of it goes overseas.

Those who see the price of gas rising as a great opportunity for the environmental changes needed in this country and around the world, I applaud the idea but not the method. We should be moving fast to that destination for economic and environmental reasons.

In addition, national security will be at risk as well. The terrorists have found a great way to weaken the U.S., and it has nothing to do with terrorism. Everyone in this country, with the exception of the savvy rich, are going to suffer greatly if oil prices continue to squeeze every aspect of our economy. They aren't bombing our buildings anymore; they are hacking away at our wallets.

Our problems reach far beyond all of the discussions. The refinery capacity issues will never be solved. Oil companies are enjoying record profits (because of shortages?) and are not going to reinvest in refineries. Why increase capacity when we are looking to switch to alternative fuels? It would be a wasted investment. Right now they are making more money than ever because of limited refinery capacity.

Basically, all of the fear-mongering and speculation are contributing to an excuse by the oil industry (both here and abroad) to increase price in order to increase profit. The U.S. is afraid to control prices because of the fair market principle; however, this market is not fair. The American people pay whatever the pump says. Until alternative fuels are available, we have little choice. It's hard to get to work on time with a 30-minute drive if you have to walk.

In summation, we need a miracle. Alternative fuel vehicles can't come soon enough. Government control of gas prices can't come soon enough. Our economy should not be held hostage by the price of oil. Recession wasn't even on the map until oil prices started climbing. The SPR may or may not have any effect. Maybe we should ask the nice oil companies to share some of their record profits with the failing economy that they helped create. Now there's a plan.

Perk

Wake up. Do some research. You will find that oil is up because we are nearing peak. The world's reservoirs have produced and are producing a maximum tilt. As a petroleum analyst who's studied field performance and has also drilled and participated in more than 200 wells in the U.S. for 28 years, I can assure you that oil and natural gas fields die--they don't last forever.

Wake up, folks. Putting oil in the SPR at $90/bbl is better than $150.

Sam

The government should have stayed out of the SPR business. We should privatize the SPR. In this case, we would not need to debate the issue. In fact, the topic should be: Should we privatize the SPR?

Nawwar

I see Dr. Alhajji has highlighted in depth. The price of oil would likely return to its previous level. Tapping the SPR is not a solution, and proponents of doing so should focus instead on these far more promising sources of domestic energy. However, the SPR is not up to the task of making oil cheaper--at least not for very long. There are hungry markets in China and India that have a significant role in determining the prices and stabilizing the market trends, too.

Ben

What we should remember is that we are heading straight into a big oil crash. Definitely, we have nothing to replace cheap oil. Get ready for the crash. It will come; it is only a question of time, because we continue to waste this beautiful (and limited) resource. Oil does not grow on trees. One hundred dollars a barrel for oil is still too cheap to get our industry and consumers to react. Let's stop wasting.

ACE

What Ben said.

andy

Drill for more oil--Alaska and offshore. Get greater oil supply, prices go down. Who is running the show here in America? All we need is a little common sense.

mike

Rebate checks will not fix the economy. As in 2003, consumers will put it into the bank and not spend it.

What will work is the elimination or sizeable reduction of federal taxes and fees on gasoline. This is truly spendable income directly from the consumer's pocket. This savings, equal to $150 billion to $300 billion will go directly into the economy. This elimination/reduction could be temporary, permanent, or scaled to the needs of the economy.

Tom Reese

I wish that the two experts discussed issues related the SPR release mechanism, the swaps, the quality of crude in the SPR, and the location of the SPR. The fact that the SPR is located in only two states while energy shortages are in the Northeast and the West indicates that the SPR des not enhance energy security of the nation as a whole.

Richard Moore

We have already enjoyed lower than real costs for oil and gas over the years. This is compared to other countries. The SPR should be kept in reserve for military use only in time of emergency. With events around the world like 9-11, how can we reach any other conclusion?

davcbr

I seem to remember years ago when the idea of a $0.50 a gallon tax that would be used to finance a sane energy policy was screamed out of existence.

So much whining.

Hugo van Randwyck

If the price of petrol rises from $3 to $6 - as in Europe- then America would start making products that can be more easily exported. At the moment the US government borrows money from China for handing out tax refund cheques, and also borrows to pay for rising oil - up from $25 tp $90 a barrel. Tax/refund suggestion:
1) Incrementally add If the price of petrol rises from $3 to $6--as in Europe--America will start making products that can be more easily exported. At the moment the U.S. government borrows money from China for handing out tax refund checks, and also borrows to pay for rising oil, up from $25 to $90 a barrel. Tax/refund suggestion:
1) Incrementally add a tax to fossil fuels every month (e.g., $0.10 a gallon of petrol every month).
2) Put the tax into a separate fund every month (using approximately 10 billion gallons a month, after 12 months, $1.20 extra tax equals $12 billion).
3) Divide the amount, every month, by the number of people over 18 (using 240 million equals $50 a month).
4) Send everybody over 18 a monthly refund check ($50 per person per month, or $600 annualized).
This uses: price signal, free enterprise, freedom of choice.

American manufacturers already have operations in Europe with the new technology. If the price of oil falls because of lower U.S. demand, say from $3 to $1.80, then add another $1.20, giving people another $50 a month refund. This will give businesses an incentive to invest and create jobs in leading edge technology and consumers to switch to more fuel-efficient technologies.a tax to fossil fuels, every month (e.g. $0.10 a gallon of petrol every month).
2) Collect the tax into a separate fund every month( using approx 10 billion gallons a month, after 12 months, $1.20 extra tax = $12 billion).
3) Divide the amount, every month, by the number of people over 18 (using 240 million = $50 a month).
4) Send everybody over 18 a monthly refund cheque( $50 per person per month, or annualised $600).
This uses : price signal, free eneterprise, freedom of choice). Americans manufacturers already have operations in Europe with the new technology. If the price of oil falls, because of less US demand, say from $3 to $1.80, then add another $1.20, giving people another $50 a month refund. This will give businesses an incentive to invest and create jobs in leading edge technology, and consumers switch to more fuel efficient technologies.

sue

Wait till the election comes closer. Oil will not be $100 a barrel. How will that happen? Hmm.

Rick

I try to drive as little as possible, and walk to places within a reasonable distance. The last thing I want is my military at the pump next to me months down the road, because the reserve was tapped by citizens. I'm a veteran, and I completely support the oil reserve for our military.

Hugo van Randwyck

I Googled "U.S. Europe miles per gallon," and found that in Europe, the average car on the highway is 47 mpg vs. 27 mpg in America. For city traffic, in Europe it is 36 mpg and 21 mpg in America. Petrol price in the U.S. are $3 a gallon, in Europe $6. The main reason for expensive petrol in Europe is tax. If America were to tax petrol gradually (every $1.20 tax is about $600 a person) and then refund it every month, in two to three years, with petrol at $6, there would likely be lower oil imports, less borrowing from China for oil imports, and more new technology that Americans can export. If oil fell to about $1.80 a gallon (without tax), with an extra $3.60 tax per gallon after three years, people could get a refund of about $1,800 a year--useful for paying off a car loan for a fuel efficient car.

Robert Bryce

Alhajji has it exactly right. The SPR is designed to be used only for emergencies. If the U.S. starts to use it as a way to hedge against fluctuations in the global price of crude, it will be no different from how China is using its SPR. And we know from long experience that the more the federal government tries to manage energy supplies and prices, the worse it is for consumers. The best way forward with regard to energy policy can be summed up in five words: Let the free market work.

Ken

I liked the idea of Hugo van Randwyck of tax and rebate on gasoline. However, consumers are worse off because the rebate does not cover all consumer losses from the tax. A tax will change the price of gasoline. The increase in price will result in two effects: the income effect and the substitution effect. The tax compensates only for the income effect, while the cost to the consumer is both. However, what will consumers do with the rebate? How are they going to spend it? Extra trips? Vacations?

Also, the idea might work only if income stays the same or decreases. If income increases, the idea of tax and rebate does not hold.

Hugo van Randwyck

Hi Ken, good question--who knows how consumers will react? The petrol tax will also apply to businesses that will have an incentive to invest in fuel-efficient vehicles and journey planning. They will not get a rebate; only consumers will, so the profit motive helps here, including company cars. So what will a person do with a rebate? People have a choice, invest in a more fuel efficient car, or if your neighbor does before you do, then you are indirectly giving your money to your neighbor. The first people to buy a more fuel-efficient car will get more in refund than they pay in tax. Also American manufacturers will finally have a level playing field, with designs that will sell in a $6 a gallon market, e.g., in Europe and Japan. Also with new business investment, productivity will rise, which helps pay for increases in incomes. Lower U.S. oil imports could help reduce the trade deficit and interest rates.

There are already petrol taxes and a system for sending tax rebate checks--the system is already in place. All that's needed is the price mechanism.

Sun_Tzu_Sun

Second wake-up call: We are at peak oil now. For those who don't know anything about it, do some Google searches.

There is no more "free market" under these conditions. Get used to it quickly (and change your habits fast).

RN

Former President Clinton used the policy regarding Strategic Oil Reserve very effectively against oil prices. On the other hand, the Bush Administration has used the same tool to prop up oil prices against the economy. The oil price bubble will come, and oil speculators need a rude awakening like all other greedy market speculators.

Pithy

I guess if all Americans were 5 feet tall and weighed 90 pounds, we could all drive Yugos, couldn't we? And our kids would fit nicely in the back seat. Drat those fat, tall Americans.

emmy

What Sun Tzu Sun said (comment on January 27, 2008 08:41 AM)! If you didn't understand it, do this right now: Google "peak oil," go to lifeaftertheoilcrash, and prepare to be depressed and scared.

Ben

I agree with "Emmy." Google "peak oil" and look on youtube as well. But I think we should not be scared; we should be active. This means cutting our use of energy and petrol, and talking about peak oil, the most important subject for our kids.

alan

The price of oil is not being driven simply by supply and demand. Its moves up are usually for trivial reasons. People in the oil business are intentionally bidding the oil futures up. If they can drive the price up even temporarily, they win from both the speculation and the higher price for their products. There is a lot of oil money that can easily be put to work bidding up the price of future contracts in oil. If the price drops, they cover the contract with their own oil.

Robert Atkins

We should drill wells off the east coast of Florida and get more oil from Canada and let the Arabs drink their oil. Why not pay small farmers $100 for a barrel of grain that we ship to these oil-producing countries? Our representatives in Washington are getting their pockets lined by these oil companies. It is election year, and nobody is addressing this issue.

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