Leave The Strategic Petroleum Reserve Alone
As gas and oil prices rise, the pressure is increasing to tap into the Strategic Petroleum Reserve. It's a dumb idea.
As the crisis in Libya and elsewhere in the Arab world continues, the oil markets have, understandably, been rocked by uncertainly and fluctuation. Here in the United States, that has led to some fairly sharp increases in the price of gasoline:
NEW YORK (CNNMoney) — Gas prices continued to rise Monday, driven higher for nearly two weeks straight by the turmoil in Libya, with analysts expecting prices to keep climbing.
The national average price for a gallon of regular gasoline rose six tenths of a cent to $3.509, according to a daily survey by motorist group AAA.
Gas prices have increased for 13 days in a row, rising nearly 34 cents in that time.
The pain at the pump is palpable for anyone who’s had to full up their tank anytime in the last week and that’s led, inevitably, to calls for the President to “do something,” even if that something is immensely foolish:
The Obama administration is considering tapping the Strategic Petroleum Reserve in response to rapidly rising gasoline prices brought on by turmoil in the Middle East, the White House chief of staff, William M. Daley, said on Sunday.
“It’s something that only has been done on very rare occasions,” Mr. Daley said on “Meet the Press” on NBC, adding, “It’s something we’re considering.”
Administration officials have sent mixed signals about the possibility of opening the reserve, which would add supply to the domestic oil market and tend to push down prices.
Energy Secretary Steven Chu said on Friday that the administration was monitoring prices, but he has been reluctant to endorse more aggressive steps.
“We don’t want to be totally reactive so that when the price goes up, everybody panics, and when it goes back down, everybody goes back to sleep,” he said.
A few days earlier, Mr. Chu said the administration was watching the situation closely, but it expected oil production that had been lost in Libya would be made up by production elsewhere.
Administration officials continue to emphasize the critical need for long-term steps to reduce oil use, like improving the fuel economy of cars and promoting battery-powered vehicles.
But recently, five Senate Democrats have called for opening the reserve, which is stored in four salt domes in Texas and Louisiana. And on Feb. 24, three House Democrats from New England, where oil is used to heat homes, wrote to Mr. Obama saying that while exporters could increase production, “they also profit from oil price spikes and therefore have little incentive to quickly respond with the increased supply needed to calm markets.”
We’ve seen this game before in the past, of course. At other points when oil prices have increased significantly and pulled gas prices up with them, whatever President was in office at the time has faced pressure to alleviate the price spike by pulling oil from the reserves, in the hope that it would have a (temporary in most cases) impact on fuel prices. The first problem with the argument, of course, is that it completely forgets why the SPR exists:
The 727-million-barrel U.S. Strategic Petroleum Reserve is the largest stockpile of government-owned emergency crude oil in the world. Established in the aftermath of the 1973-74 oil embargo, the SPR provides the President with a powerful response option should a disruption in commercial oil supplies threaten the U.S. economy.
In fact, the 1978 Energy Policy And Conservation Act sets forth specific criteria that must be met in order for a drawdown to be made from the reserves:
(8) The term “severe energy supply interruption” means a national energy supply shortage which the President determines –
(A) is, or is likely to be, of significant scope and duration, and of an emergency nature;
(B) may cause major adverse impact on national safety or the national economy; and
(C) results, or is likely to result, from
(i) an interruption in the supply of imported petroleum products,
(ii) an interruption in the supply of domestic petroleum products, or
(iii) sabotage or an act of God.
(…)
in addition to the circumstances set forth in section 3 (8), a severe energy supply interruption shall be deemed to exist if the President determines that –
(A) an emergency situation exists and there is a significant reduction in supply which is of significant scope and duration;
(B) a severe increase in the price of petroleum products has resulted from such emergency situation; and
(C) such price increase is likely to cause a major adverse impact on the national economy.”
In other words, the SPR exists to be tapped into when there are major, unanticipated, interruptions in the supply of oil. It was proper when President George H.W. Bush used it to alleviate the temporary supply disruptions caused by the first Gulf War, and when President George W. Bush used it in response to the serious supply disruptions that occurred in the wake of Hurricane Katrina. These were, at least, unforeseeable disruptions in supply.
That isn’t what’s happening now. What we’re experiencing now is a price spike caused by uncertainty in the futures market over not only the future of Libya, but also the future of the Arab uprisings — especially the $64,000 question of when, or if, they hit Saudi Arabia. By all indications, the disruptions in the supply of Libyan oil are being made up elsewhere. The other major factor that continues to guarantee that oil prices worldwide are headed in an upward direction, of course, is the fact that China and India are now major consumers of petroleum and, as long as their economies continue to boom, their demand will continue to have upward pressure on prices (and this will be true regardless of how much domestic oil production we engage in, by the way).Finally, we’re talking about a commodity whose major supplies happen to located in the most politically unstable part of the world.
In other words, we’re living through a market fluctuation. A major one, but a market fluctuation nonetheless. Manipulating the market by tapping into a supply that is supposed to be reserved for a real emergency is really quite foolish, and, in the end, doomed to fail.
This happens every time gas prices rise, and you’re right. The SPR is for far worse conditions than these.
I remember after Katrina when the supply route from Lousiana refineries to the East Coast was completely cut off. I went to a gas station at 5pm on a Tuesday and they were literally out of gas. That’s a supply disruption. This is not
The problem is that although there may be a difference practically among the present circumstances, the situation during the Gulf War, and the aftermath of Hurricane Katrina, politically, the difference is much less: if oil prices go up (and the economy goes into a tailspin as a consequence) politicians will be blamed if they don’t tap the SPR.
There are also some larger questions. Why are we this dependent on oil prices? (note: market oil prices are a much lower proportion of price at the pump in Europe and elsewhere) Should we have a strategic petroleum reserve? I have an open mind on this subject. I’d be interested in arguments pro and con.
Dave,
My friends on the right would tell you that the answer to your questions can be summed up as “Drill Baby Drill” I tend to think it’s more complicated than that, especially considering that global energy prices aren’t within our control.
I agree, though, that politically the differences aren’t all that apparent, but what the advocates of tapping into the SPR now forget is that, if we do, we’ll have to pay to replenish it. Probably at higher prices than we paid when we put the oil in there.
Is there anybody who knows what the heck he or she is talking about who believes that we can find enough additional oil domestically to make a material difference in gas prices at the pump? We could, potentially, become less vulnerable to 1970s embargo-style supply disruptions (since most of the oil we use comes from Canada or Mexico that’s not all that likely). I think there are strategic reasons for increasing domestic production but the economic justification is not nearly so clear.
The U.S. holds less than 2% of global crude reserves. Opening every last spigot in the country won’t do more than lower gasoline prices by a few pennies per gallon.
At your site Dave, we talked about Jevons’ Paradox. I said then that I’d have to drive 3x my previous consumption to make the Paradox true. I thought about it later, and I’ve got to admit a worry. My Prius may not affect just my own consumption. Buyers of new Chargers may drive more because hey, in future they’ll just buy a Prius.
I think the crux of your current question is how much conservation we need to do now, and how much we have to be confident of in the future.
If we wanted everyone in a Prius now, we’d set the gas tax accordingly. But, perhaps it’s enough that we know we can go that way later on …
http://www.consumersearch.com/blog/261-mpg-volkswagen-xl1-prototype-hints-at-hyper-efficient-future-car
(Man, would I be a road-tripper with an XL1!)
“The Obama Misery Index and the Rise of Obamavilles” is the best blog post I’ve read in a long time. This is why President Obama will be a one-term president! http://t.co/hhFr73z
I can’t recommend this piece highly enough. This will be all the ammo we’ll need when talking to other voters during the 2012 general election.
Mitt, you are such a big spammer ;-).
“Dan” … yeah, right!
Yes, Dan, Obama is doomed because all those poor and unemployed people who are suffering in “Obamavilles” will rush to vote for Romney, knowing that he will ease their pain by cutting taxes on the rich and slashing government services that could help them.
Due to the way crude oil is bought and sold, supply and demand are far from the only factors in setting the price. Right now, the price has gone up because of worry about the supply in the future. Playing devil’s advocate here, releasing crude from the SPR could induce confidence in future supply.
And once again, I’m reminded of how much I hate the influence of emotion on markets. They drive prices to extremes without justification, to my mind.
Throwing a few oil speculators in jail would do wonders for the price of gas.
So would simply refusing to use U.S. taxpayer money to bail them out when they get too greedy.
Boyd, given global supply chains (with some of our oil coming from Alaska, Canada, Mexico, …) I’d say that when merely restricted supply generate higher prices, it is the natural and best solution.
Hopefully car-buyers are sizing their cars with some pessimism, say an expectation of gas prices that “might” be 1.5 to 2 times whatever is current. Lord help the poor fool who buys expecting a decline.
ponce, speculators merely do “price discovery.” That is, they test what people are willing to pay, and that itself becomes a justified price.
Now, we might all like prime rib to be 50c/lb, but it won’t be. There has been price discovery.
Fear regarding loss of Libyan oil is somewhat justified, as it is one of the last sources of high quality crude left on the planet. A barrel of Libyan oil produces three times the diesel and gasoline of Saudi Arabian oil.
Libyan production is about 1.2 Mbbl per day, so total loss of the country’s crude would require
OPEC (meaning Saudi Arabia) to increase daily production by over 3 Mbbl per day to compensate.
That spare capacity simply doesn’t exist.
There are a couple economists who have a “Drive Less” campaign each time higher prices (or proposed boycotts) roll around. There’s nothing wrong with that. (Don’t like speculators, ponce, drive less).
Now, I think they are a little slow to accept “Drive Smarter” (with, let’s face it, a Prius), but their campaign isn’t all bad.
Going back to a national speed limit would help. It’s amazing how many people bitch about the high cost of gasoline yet routinely drive 15-20 mph over the speed limit.
“ponce, speculators merely do “price discovery.” ”
Just like banks “merely” make home loans, John?
Boyd hits the nail on the head and while ponce has a point the speculators haven’t broken the law. The Commodity Futures Trading Commission failed in January to put in place position limits that would have removed the flood of speculative money that has invaded the market in the past ten years.
The last time oil was this high President Bush opened up off shore drilling areas and oil began it’s march downward. The economy had much to do with it as well but the idea we have new oil spooked the speculators. In February the big speculators purchased over 200,000,000 barrels of oil seeing the middle east get shaky. The market doesn’t function properly because emotions are running it. Throw in political posturing here at home (think gulf drilling ban for no good reason) and it’s an irrational market. The Cushing hub is full, supplies are at a 20 year high, Bakken oil is coming on line, fracking is reinvigorating old wells, and natural gas in replacing oil in some applications. The supply is fine yet traders are forcing another bubble that will burst after it has caused damage.
The psychological effect of selling some SPR oil could very well help and since it’s full it couldn’t hurt. A release could do far more than the failed stimulus. Start granting permits for gulf and see what happens as well. This entire fiasco has developed because we have wasted time, energy, and money on green subsidies that have failed while we ignored how things really work. Our economy needs energy to run. We can ignore that at our own peril.
ponce, go find the Planet Money episode on the 30 year mortgage. (Short phone response)
“while ponce has a point the speculators haven’t broken the law.”
Apparently, neither did any of the bankers who caused our recent economic meltdown, because none of them are in jail.
China executes businessmen who work against the interests of China.
Seems to be working quite well for them.
Maybe the Fed and Treasury should quit debasing the value of the US $ by printing it like toilet paper. This would also take the cooperation of the House, Senate and President Spend a Lot. The weaker the US $ the higher prices of imported items in dollar basis goes, but the idiots who want to jail “evil speculators” can go on believing in unicorns and fairies. mpw
It must irk people like ponce that the biggest oil speculation trade was made by Pres Bush, against the wishes of the democrats in the house and senate no less, he started buying for the reserve in the 30’s per barrel and now it is 105 and change a barrel as of the writing. We should throw the US government in jail for speculation in the future price of oil for filling the reserve according to ponce.
I wonder if ponce realizes that his ramblings on a site like this, if he were in the China that he thinks is so good with capital punishment, could get him kneeling in front of the 25 cal pistol and his family getting the bill for the shell. Why do people think it is so great to kill certain people when it suits THEM, when what they are doing could easily be next on the murder list. mpw
Look at these gas prices!! Gdammit! This shows the left was correct all along. Bush and Cheney – and all their oil cronies – are controlling the price of oil and gas and raping the consumer!! We need a new President not beholden………..oh, wait……..
The supposedly considered releases are a) dumb, b) about a days worth of consumption. Pure politics designed to make the dolts think action is being taken.
In case the world has passed some by (and it clearly has) shale extraction reserves and technolgies are now economically and environmentally viable, and could cut the, uh, canastas off the Middle East and Venezuela. What we have is an Administration that can’t look past the green stupidity and reduce our foreign dependance. It really sad, irresponsible and dangerous.
That’s the operative phrase Dave… unfortunately, when did not knowing ever stop someone from claiming that they know (or rather they know who the people are who know what they are talking about).
Steve, did you just make a Keynesian economics argument? Basically spend our way out in order to stabilize markets? 😉
@Boyd
“And once again, I’m reminded of how much I hate the influence of emotion on markets. They drive prices to extremes without justification, to my mind.”
Anybody else find this amusing?
@Drew
“In case the world has passed some by (and it clearly has) shale extraction reserves and technolgies are now economically and environmentally viable, and could cut the, uh, canastas off the Middle East and Venezuela.”
Could the extraction companies do it without government subsidy? Would they do it without government subsidy?
This is for Dave S. and Sam.
Originally used to increase natural gas yields fracturing has now been refined to a point where it can improve yields for conventional oil. Not only are new wells being fracked but old wells are being fracked to increase production. This is all coming with no government subsidies.
Occidental is investing over $6 billion in California to reinvigorate old wells in fields that have been around for decades. Other companies are not only fracking wells but drilling new ones in California. This coupled with improved exploration techniques has oil people convinced we can lower imports to 20% in five to ten years. CNBC and Der Spiegel have both stories concerning this as well as many oil industry publications. So yes, we can make a material difference.
The only thing standing in the way of energy security (not independence) is our own government.
Oh, Matt, I’m saying an a market that has lost the ability to function rationally someone can just as easily drive prices down as up. Rumors in the last two weeks have move oil up $2 or $3 a barrel. If the government shows it’s serious about using the reserve, allowing drilling, and opening up new areas we could see downward pressure. If the CFTC had done it’s job the speculative money would be out and only real oil companies would be buying futures instead of hedge funds and public retirement systems. You simply cannot increase the amount of speculative money in a market without driving prices up.
@Plunk
“The only thing standing in the way of energy security (not independence) is our own government.”
Ah, yes, the bad ol’ gubmint argument. My question was specifically about oil shale production, so your observation about existent liquid oil wells is not really apposite. And, in response to the rosiness of your reportage, hydrofracking for gas has a host of environmental problems associated with it (see, Regulation Lax as Gas Wells’ Tainted Water Hits Rivers), is there any reason to suppose that fracking oil wells won’t also present problems? I’d also point that the bad ol’ gubmint is talking about taking away the bad ol’ subsidies for the oil companies. (Will all that fracking fracking continue if the subsidies are cancelled?)
Oh, yeah:
“This is all coming with no government subsidies.”
Look up the word ‘fungible”.
Steve P. wrote:
Steve, the reason why this is still largely a Keynesian argument is that, with the exception of the reserve, all of these are things that will have little to no effect on the amount of crude in the market for quite a while. So opening up drilling is purely psychological/emotional. And its operating on a fundamentally different timescale than speculators (who are still largely focused on short-to-mid term conditions).
My understanding is that the amount of the reserve that we’d need to dump to stabilize things would be pretty significant. At that point, the question becomes whether or not this is the right sort of situation to spend our way out of.
@Ben
“The U.S. holds less than 2% of global crude reserves. Opening every last spigot in the country won’t do more than lower gasoline prices by a few pennies per gallon.”
Yeah, but to Drew’s point:
The stuff is there, but getting it out isn’t easy. That’s why I raised the subsidy question: it’s hard to conjure an expansive new energy extraction industry not lobbying, and lobbying strongly, for government assistance. Especially since it’s “for the national interest” (the right-wing analog to “for the children). And then there are the politico-environmental issues associated with extraction. For instance, I would suspect that it would take a lot of water to do it (the report says, three barrels of water for one barrel of oil). Much of the water will be sorely contaminated. What to do with it? And note where the Green River Formation is: The Colorado River Basin. For why this could present megaproblems, see Arizona v. California. Those two states have been fighting over Colorado River water since forever. I can’t imagine that large-scale shale oil extraction wouldn’t result in lawsuits flying all over the place.
So, contrary to the deepest wishes of some, I don’t see government “getting out of the way” of any of this at all. And a good thing.
Sam, Fracturing hs been around for decades but the environmental movement has just recently put it in it’s crosshairs. It seems anything fossil fuel is bad and they will malign it however possible. Don’t pump the fracked oil and then we bring in oil on a boat. That might cause some problems. So far fracking has been deemed safe.
Make fun of the gubmint argument all you want, it won’t change the facts. It;s been civil so far so let’s not start down the road of laughing at one another or playing the game of paint each other as ignorant hicks or elitist limosine know it alls. BTW, the fungible nature of world oil supplies may allow us to inject foreign subsidies in discussion but realistically we’re talking US subsidies.
The Bakken deposits are a great example of the oil being extracted from private lands with little environmental impact. It creates jobs, it fuels America, and it enriches the entire state of North Dakota to the tune of a $1 billion a year in royalties. That’s no subsidy.
The amount of water used in fracking is inconsequential to regional water supplies. Regardless, environmental protections are in place and instances of pollution are violations of the rules not following them. We don’t shut down the freeways when someone speeds or an accident occurs. There will be errors along the way but immaterial in size.
Matt B., It is psychological/emotional that’s why some psych-ops would help. Heck, they could claim they’re opening the reserve and not even actually do it and it would lower price. If we did sell oil now at a high price and replaced it after prices receded it wouldn’t cost a thing. Buy low sell high. Psychological stimulus like release some oil or freezing business regulations may seem Keynesian but if money isn’t really spent are they?
Fracturing is extremely expensive and energy intensive. The claim we are sitting on vast reserves which will soon be unleashed is pure propaganda.
Fracturing has been in use for increasing oil production since 1947. That’s right, 1947. Its use in natural gas production is a joke; what isn’t generally known in that the companies specializing in it are all going broke. Natural gas will have to at least double in price for them to become profitable.
There is no chance of recovering 800 gbbl from the Green River Formation. That figure assumes we are willing to spend an unlimited amount of money regardless of the economics, and also doesn’t take into account Energy Returned on Energy Invested. Nor does it take into consideration the enormous water requirements and serious environmental degradation that result from shale mining, a process virtually identical to the strip mining of Alberta’s oil sands:
http://ngm.nationalgeographic.com/2009/03/canadian-oil-sands/kunzig-text
Ben, I have to disagree. If it gives little in return then why are companies investing so much into it? Occidentals investment? The North Dakota wells? The fact that private firms are investing shows me this is not propaganda.
How does drilling into shale formations equal strip mining oil sands? Why is natural gas falling in price while drilling continues? Because it makes sense economically.
Advanced drilling is improving every day and time will tell if it plays out. The industry is betting it will. Putting their own money on the line is telling.
Ahhh one of our resident progressives shows his true totalitarian side…maybe we should send businessmen who want to make a profit to Gitmo or a black torture site, eh?
How about we just declare the Gulf of Mexico, ANWR, Colorado, Utah, the Dakotas and both seaboards part of the strategic US reserves and tap away?
Worldwide discoveries of new petroleum fields have declined every year since 1964. Everyone is in love with cheap gasoline, but no matter what happens in Libya, the trends aren’t favorable.
It is really amazing that people like Charles can reconcile this idea that there is oil ready, to “tap away” with efforts like BP’s to drill 20,000 feet deep in the Gulf.
Charles, do you really suppose that the oil companies would be doing that, or the Herculean efforts with tar sands, if there was all the “tap away” oil ready to go?
Of course not. Remaining reserves are hard, slow, and expensive.
john personna, there are any number of places where there is readily available oil that has been declared off limits by the government to appease the Greens and Watermelons. Check the previous post for a few of them. Or don’t and keep spouting nonsense.
Oh, and people like me? Racist.
By people like you I mean ideologically blinded.
Go ahead name shallow onshore reserves and scale them to US consumption.