Thursday, May 15, 2008

Strategic Petroleum Reserve: It’s A Matter of Economics, Not Gas Prices

The House and Senate just passed HR 6022, a bill to direct the president to suspend purchase of petroleum for storage in the Strategic Petroleum Reserve. Its rationale, and the reason it made the news was that this would decrease overall demand for crude and drive down the price of a barrel of oil.

The Bush Regime was completely against it, but passage of the bill, unanimously in the Senate, and overwhelmingly (385 - 25) in the House, guarantees either Bush’s signature or a veto override.

Bush rationalized that purchase of 70,000 barrels of crude per day is a mere drop in the bucket compared to the 21 million barrels that the United States consumes every day and won’t affect the futures price.

That’s 0.33% of all of the oil consumed in the US per day. I don’t often say this, but Bush is probably right, it probably won’t do a thing to the oil prices. The Chron labeled the bill “feel good legislation” for just this reason. Legislation like this, and ideas like the proposal to suspend the federal gas tax this summer, are merely, as Obama puts it, “an election-year gimmick” as well as an attempt to show the voters that Washington is trying to do something about the soaring cost of petroleum.

But that doesn’t mean the bill is a bad idea. I like it that the Feds are going to stop buying $126 per barrel oil and sticking it into the ground. Filling the petroleum reserve should always be about supply and demand. Right now there is no demand to fill the reserve but the oil speculators have driven up the price of oil, they say, based on future demand. Buying petroleum at today’s prices in preparation for some future shortfall is insane. It’s like buying a high-priced cut of meat, like prime rib, in case there’s a meat cutter’s strike someday.

It’s irresponsible to pay $8.8 million per day (in taxpayer dollars, mind you) for oil when its price has been so jacked up. The bill provides that strategic oil purchase can resume when prices fall below $75/barrel. That, friends and neighbors, saves the taxpayers nearly $3.6 million every day.

That’s just good economy.

No, if you want to do something about the price of oil, you have to do something about what is driving the oil speculators to keep on jacking up the futures prices. I’ve looked around and this guy says that these high prices are here to stay, that what we are experiencing right now is no “bubble” that can burst, causing a price drop to more reasonable levels.

He says “This ain't a bubble, folks. Better get used to it.”

If that’s the case then the bill just passed will eventually be repealed or nullified, but I really think the guy is all wet. He’s right about some things though. The price of oil has been driven up by a weak dollar, since oil is traded in dollars. He’s right that both India and China have become greater consumers of petroleum and their demand has placed some pressure on supply.

But there are other things that have driven up the price of oil. Things that speculators take seriously. And things that can be controlled.

Like war and nukes in the Middle East.

It’s hard to quantify how much more a barrel of oil costs because they are in a shooting war in the Middle East, and there’s talk of nukes in (and nuking of) Iran. But I’ll bet there are people who have done exactly that. When you say things like how you will “obliterate Iran,” with little concern for the fact that futures speculators will want to take into account the inability to produce oil in that country for 250 years, you do a little damage, and oil goes up.

I suspect that when peace breaks out in the Middle East, and maybe it will someday, we are going to see oil prices go back to their sub-reasonable levels of, say, $60/barrel. Absent that ever happening, even US withdrawal from Iraq ought to have an effect at the pump.

It’s going to take some common sense, some cool heads, and better economics, but this oil bubble will burst someday.

But for now, that Prius (or, I guess, that Honda Civic hybrid) is starting to look mighty tempting.


mcblogger said...

You could still pump oil out of the ground. Just jacket the wellhead and pipeline with lead.

And you'd only really have to do that if some really dirty weapons were used.

The far bigger problem is where the fallout blows...

Anonymous said...

I agree with the writer about the economics of the situation. Theoretically, when demand is high and the price is high, you don't buy, you sell.

However, oil supply (in general) is not just a matter of economics, but also of national security. If the oil in the Middle East, Russia or South America is suddenly used as a weapon to force the U.S.A. to bend to the political will of other countries, the populace will scream at the President and Congress for not preparing for this. Can you imagine a time when fighter jets can't fly, non-nuclear warships can't steam and tanks can't roll? Granted this is an extreme example of what can happen when the general oil supply is restricted and it is not the role of the Strategic Petroleum Reserve (SPR) to supply the military with fuel. But it is not out of the realm of possibility for such consequences if the fuel supply is disrupted for an extended time period. It is far more likely that heavy rationing, restricted automobile use and rolling blackouts would be the norm.

The SPR is designed to protect against such disruptions. Right now, it only maintains the equivalent of a 58 day supply of the country’s oil needs. Furthermore, if we actually needed to tap its reserves, we could only withdraw about 4.4 million barrels a day. That is barely equal to 1/3 of the amount of net imported oil we use daily. I argue that that we should be planning to expand the SPR to eventually supply us with up to 2 years of oil supply with a withdrawal capacity to equal to the net amount of oil we use per day. Even with such preparations, it would take us years to start drilling in ANWR, the oil shale of Colorado and the various targeted offshore sites in the Gulf of Mexico to permanently replace the hypothetically lost oil supply. We should have been filling the SPR when the price was $25 per barrel, not $125. But can we afford to gamble that the price will drop? What if it doesn’t? The bottom line is that we should prepare for these situations BEFORE we need them. There is no doubt that we will eventually need them. So we should stop arguing and START DRILLING NOW and keep filling the SPR.