In the aftermath of the 1970’s energy crisis, the U.S. Congress passed the Energy Policy and Conservation Act (EPCA). Signed into law by President Gerald Ford (R) in 1975, the law established the U.S. Strategic Petroleum Reserve (SPR), which is intended to be used to help carry us through serious oil supply disruptions like the 1973-74 embargo. Stocked nearly to capacity with 726.5 million barrels of oil, the SPR is today the largest emergency fuel supply in the world.
In the event of short-term oil supply disruptions, the U.S. federal government can loan oil from the SPR to oil companies, who then repay the oil (with additional oil as interest) back into the SPR once the supply issues are resolved. Since 1996, this has been done about a dozen times due to pipeline blockages, channel blockages, accidents, and hurricanes.
Additionally, during more serious oil supply disruptions that threaten national security or safety, the government can sell oil from the SPR on the open market to ensure sufficient supply in the market. This has only been done twice, first during Operation Desert Storm in 1990-91 (21 million barrels), and second following the massive oil supply disruptions caused by Hurricane Katrina in 2005 (11 million barrels).
The SPR has only been used once for reasons other than mitigating oil supply deficiency. In 1996-97, under President Bill Clinton (D), the U.S. government sold 28 million barrels on the open market for the purposes of deficit reduction. These sales both artificially reduced the federal deficit in those years, and helped push fuel prices below their natural equilibrium price. Those of us who enjoyed the spectacularly-low gas prices in the late 1990’s, and who remember the subsequent economic shock when they jumped up more than $0.30/gal. in a short time thereafter, can place at least some of the blame for the price instability on the government.
One thing that the SPR has never been used for, however, is the direct manipulation of oil prices . . . although this was a presumably-unintentional side effect of the deficit reduction sales in the late 90’s. The purpose of the SPR is to ensure that oil is available first-and-foremost for military and defense purposes, and secondarily for purchase on the domestic market. Although supply levels naturally impact price, artificially lowering the price-point of oil is outside of the intent and purpose of the SPR.
All else being equal, the Organization of Petroleum Exporting Countries (OPEC) controls the price of oil. This international cartel, made up primarily of avowed enemies of the United States, would be an illegal monopoly if it were subject to the normal rules of free commerce. Its price gouging regularly crops up at the most inopportune times, and has a broad negative impact on the economic well-being of the rest of the world. While draw-downs on the SPR can force the prices lower in the short term, as they did in the late 90’s, those prices inevitably shoot back up higher than they had been before.
In other words, SPR draw-downs don’t solve the problem . . . they just mitigate it for a little while. The problem is that we are reliant on belligerent enemies for our national fuel needs, and they have no compunction about abandoning the basic principles of the free market (e.g., not establishing a price-fixing monopoly)—or their own people, for that matter—for the exclusive benefit of their own totalitarian ruling classes.
The only way to really fix the impending energy crisis is domestic oil production in the short term, followed by alternative energy systems (nuclear for grid power, hydrogen fuel-cell for cars) in the long term. For twenty years or more, leaders representing both the Republican and Democratic parties—including Presidents George W. Bush (R) and Barack Obama (D)—have failed us on this front. No matter how much they talked about the urgent economic and national security reasons for pursuing energy independence, as well as the environmental benefits of moving beyond oil, none made any real headway. In fact, Obama has chosen instead to actively obstruct the short-term drilling solutions that would give us enough economic flexibility in the short term to make heavy investments in the long-term solutions.
Because we have neglected domestic oil drilling and alternative energy development for so long, we cannot possibly bring enough domestic production to bear fast enough to offset OPEC’s most recent round of price gouging. The instability in the middle-east has given them sufficient political cover to jack prices up to the highest levels in recent history and, frankly, there’s not a darn thing we can do about it. Some are calling on President Obama to tap the SPR to offset this new round of gouging, but this would be a misuse of the reserve not seen since the deficit sales in the 90’s. In fact, sales from the SPR for the specific purpose of manipulating price would be entirely unprecedented. Supplies are not constrained and, as such, we cannot and should not use the SPR at this time.
Even if we were to accept that the federal government should artificially manipulate oil prices to keep prices low—which I do not—it has much faster and simpler means at its disposal than back-handed manipulation of supply. The government could instantly lower the average price of gas by about $0.18/gal. by suspending the federal gas tax. It could lower the price even further by suspending the patchwork of regional environmental regulations imposed by the EPA, and even further than that by using its Constitutional authority to regulate interstate commerce to abrogate state laws about fuel mixture (at least in cases where the fuel is sold across state lines). Each of these would be faster, easier, and more effective than tapping the SPR, and would still leave the SPR fully stocked in case it is really needed at some point in the near future.
Middle-east instability thus far has not constrained supply, and oil production and transport would-wide has been essentially unaffected, but it is too early to tell whether the recent coups and attempted coups in Tunisia, Egypt, and Libya will continue to spread, or what effect more violence will have. Civil war in Iran, Saudi Arabia, Kuwait, or the UAE (for example) might have broader impact on supplies. If one or more of these countries’ governments fall, they may be replaced by leaders less willing to sell oil to us infidels in the ‘west’ at all, or might take advantage of the spreading instability by demanding drastically higher prices than those we are already paying.
Rather than drawing-down on our reserves, we should be increasing capacity and adding to them—one of the very few areas that warrants increased federal spending in a time when most federal programs should be seeing drastic cuts. The SPR is a direct matter of national security, not something to be played with to score political points when gas prices go up.
More importantly, it is time to stop playing games with our energy independence. For both economic and national security reasons, it is time to begin exploiting our domestic oil resources to the fullest. The companies that benefit from the newly-opened fields, both on- and off-shore, should be levied a reasonable tax on their oil profits, and every cent from those taxes (and every cent saved from reduction in our dependence on the OPEC cartel) must be re-invested in domestic nuclear power plants, electric battery and motor research, and fuel cell research. Smart public policy can end our reliance on foreign oil without increasing the federal deficit, but it won’t happen if we keep thinking in terms of short-term band-aid solutions.