Tap the Strategic Petroleum Reserve
Now that the price of oil has hit $135 a barrel, President Bush’s decision to stop adding to the SPR isn’t enough. The U.S. should deploy it to reduce prices. Pro or con?
Pro: Oil Needed Now More Than Ever
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 collusive activities of the OPEC cartel. It is both a rigged and speculator-driven market. Stubbornly unwilling to recognize this fact, the Administration has misused the SPR either willfully or through gross mismanagement in a policy that has supported and validated ever-rising prices.
In 2007’s State of the Union address, President Bush called for the doubling of the SPR, even as oil prices tumbled toward $50 a barrel. Presto, almost immediately after his speech, the price stabilized and began its rocket-like ascent to today’s $135 a barrel.
Last fall, when prices were “barreling” past $90, Energy Secretary Samuel W. Bodman boldly announced—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.
As late as it would have been, nonetheless at that moment we should have received instead an announcement that 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.
A restive Congress has recently forced the issue, calling on this Administration to desist from making further additions to the SPR, and presented the President with a bill that, given its overwhelming approval, was in essence veto-proof. The President, recognizing the inevitable and aware of the growing anger in the nation at large, reluctantly signed the bill.
Now, for once, Congress has clearly taken over the mantle, and we will soon find out where this will take us. One last question: What would a sizable release from the SPR do to the speculative longs on the trading exchanges, and breaking the presumption of a one-way direction that the market has begun to take for granted?
Con: Deployment Will Only Add to the Problem
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 contributed to increased supplies. These actions 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.
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.
The decrease in oil prices that will result from the U.S. government’s recent halting of SPR buildup will be larger than the decrease in oil prices resulting from deploying that same amount would be.
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.
Editor’s Note: The authors have updated their essays as of May 22, 2008. (They first appeared in January, when oil had hit $100 a barrel.)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.