Speculator’s Political Reserve?

Strategic Petroleum Reserve or Speculator’s Political Reserve?

An aerial view of the Bryan Mound storage site of the Strategic Petroleum Reserve. Photo: Dept. of Energy.

In the previous essay, Senator Chuck Schumer (D-NY) was quoted in a letter to then-President Bush: “The [strategic] petroleum reserves are intended to provide relief at times when working families are struggling to make ends meet.” Politicians have a long history of requesting that the Strategic Petroleum Reserve (SPR) be utilized in an attempt to influence gasoline prices. But is that an appropriate usage of the SPR?

The Purpose of the SPR

Let’s review the purpose of the SPR. From the Department of Energy’s website on the SPR:

In the event of an energy emergency, SPR oil would be distributed by competitive sale. The SPR has been used under these circumstances only twice (during Operation Desert Storm in 1991 and after Hurricane Katrina in 2005). Its formidable size (700-plus million barrels) makes it a significant deterrent to oil import cutoffs and a key tool of foreign policy.

So the question becomes, “Do high energy prices constitute an energy emergency?” I understand that high fuel prices are a financial burden on most people, but I believe there is a big difference between high gas prices and a true emergency.

A True Energy Emergency

Fuel shortages have happened in the U.S. before, and could happen again for a variety of reasons. If a major source of U.S. oil imports was cut off, shortages could quickly develop and our society could come to a grinding halt. Imagine another 1973 oil crisis that resulted not only in much higher oil prices, but in gas lines and fuel shortages. The SPR could then be tapped to ease those shortages, and if it appeared that they would be extensive it would buy time to implement emergency measures such as rationing.

And as others have pointed out, OPEC can respond to a release from the SPR by simply cutting back on production. If we had released oil from the SPR every time Senator Schumer requested it, oil prices would almost certainly still be over $100 a barrel, and we would be sitting here as a country with a depleted reserve — albeit not very strategic in that case.

Ironically, Senator Schumer once said that “A well-stocked SPR is our best defense against OPEC supply quotas that threaten the western economies.” Just wait until he hears about the Senator Schumer who seems determined to deplete the SPR. Those guys won’t get along very well.

Shorting is a Form of Speculation

One of the biggest ironies is that some lawmakers argue that we need to use the SPR as a tool to fight against the speculators. But what is speculation? While we generally think of speculation as investing in some sort of commodity and hoping the price goes up (or actively trying to influence the price), it is also speculation to sell something in the hopes of buying it back later at a lower price (in essence, the same idea as short selling). Both of these involve risk and speculation on the direction of prices, and the same lawmakers who condemn the speculators become speculators themselves when they use oil from the SPR in an attempt to manipulate oil prices.

Besides, the rise in oil prices over the past decade isn’t primarily due to speculation, it is due to the fact that supplies are depleting while global demand has grown. Playing political games with the SPR won’t do anything to change that equation. Indeed, such games merely confuse people into believing that oil prices are high mainly for reasons other than supply and demand. No doubt there are elements of speculation, but without the supply/demand problems speculators couldn’t have much impact on the price of oil. Therefore, it is highly unlikely that the SPR could have anything more than a short-term impact, and once that impact is over oil prices will return to their previous levels and we will have used up some of our insurance policy.

Conclusion

So, contrary to Senator Schumer’s belief, the purpose of the SPR is not to play the oil futures market in an attempt to bring oil prices down. The “S” stands for “Strategic”, not “Speculative.” The SPR is there to guard against a severe energy supply interruption. It is one thing to deal with the financial inconvenience of higher prices, but it is quite another to be unable to get fuel.  If we start using the SPR in a speculative fashion in an attempt to curb oil prices, and then a true supply interruption occurs, how bright are our lawmakers going to look then?

Additional Reading

More SPR Nonsense

Stop Filling the SPR?

Critiquing the SPR Swap Plan

Schumer: Wrong on the SPR Since 1999