Tapping the SPR: The Root of Dysfunctional Energy Policies

Falling Into the Trap of Influencing the Crude Oil Markets

It seems that nothing quite brings out the silliness in politicians like the Strategic Petroleum Reserve (SPR). As you undoubtedly have now heard, the United States and the International Energy Agency are coordinating to release 60 million barrels of oil to the world markets. The U.S. portion of the release will be 30 million barrels from the SPR.

As I noted recently, despite my general Democratic leanings, I think Democrats are the most out-of-touch party when it comes to energy policy. I think the root of the problem can be understood if one examines some of the core beliefs of the Democratic party about energy and the environment. One is that greenhouse gas emissions must be brought under control. This is different from the Republican platform, which doesn’t concern itself much with greenhouse gases. In support of this goal, Democrats support carbon trading markets and various ideas to put a price tag on carbon emissions; ideas in general which would help drive up the cost of burning fossil fuels. Higher prices will also lead to conservation, another tool in their arsenal for reining in carbon emissions.

But a second core belief of the Democratic party is that fuel prices hurt the average American, and therefore must be kept low. The fact that this goal is totally at odds with their goal of lower carbon emissions seem to be lost on many. A perfect example is provided by the latest essay from Joseph Romm. Romm was part of the Department of Energy during the Clinton Administration. Time Magazine has called him “The Web’s most influential climate-change blogger” — and I would agree with that assessment. When I think of Joe Romm I think of someone who spends the vast majority of his time fighting for the reduction of carbon dioxide emissions. Almost every article he writes is on the theme of climate change.

Yet somehow this person who considers climate change one of the most serious threats to mankind thinks we need to make gasoline cheaper:

Why selling off the Strategic Petroleum Reserve is a good idea

Let’s take a look at “why” he thinks this is a good idea. He first reminds us of his July 2008 testimony at the Select Committee on Energy Independence and Global Warming hearing:

I have three main points. First, we tried offshore drilling in 2006 and oil prices doubled.

Wow. Debunking that could be a standalone essay. While I would agree that expanded drilling is unlikely to have a major impact on prices, the statement above is pretty silly. But that’s an essay for another day. Continuing…

Second, the only plausible remaining strategy for reducing oil prices fast is opening up the Strategic Petroleum Reserve or SPRO while making a major push for oil conservation.

There it is. Look, I can understand the desire to reduce oil prices. But coming from someone who believes climate change is such a serious threat, this argument is just bizarre. It’s like Richard Simmons campaigning to lower the price of Whoppers. Success with one undermines the other.

And remember that Romm called this “the only plausible remaining strategy for reducing oil prices fast.” Yet there was no general release of oil from the SPR in 2008, and prices were reduced really fast — from $147 around the time of Romm’s testimony all the way down to the $30’s by year’s end. (There were exchange agreements with some oil refineries in the wake of Hurricane Gustav and Hurricane Ike — but no general releases to the market as in the current situation). So it would appear that there is another plausible strategy for reducing oil prices fast — and that is to let high prices kill off demand.

Romm goes on to argue that the SPR can be used to pop a speculative oil bubble. There is no argument that the release of oil into the market can impact prices. But then what about when it has to be refilled? Romm’s answer to that is simple. Don’t refill it:

Let’s face it. The strategic reserve is not strategic. It was created at a time when people worried that countries could withhold oil from us. But now we have a global market, so that isn’t possible.

I am at a loss for words. The only way this scenario works would be for there to be large quantities of excess global capacity. We are dependent on OPEC for almost half of our oil imports, but no, I am sure they could never withhold oil from us. They simply don’t have the discipline to keep oil off the market. Why, that might drive oil prices all the way to $100…

But imagine for a second that political instability in Saudi Arabia takes 8.5 million barrels a day of oil production off the global market. Under Joe Romm’s scenario, life in the U.S. comes to an immediate, grinding halt. At least with the SPR in place, critical services can continue to operate while secondary plans (like rationing) are put into place. The SPR is supposed to be there as an insurance policy in case really bad things happen. Hopefully, we never need it. If we do and it isn’t there? Joe Romm would have some ‘splaining to do.

It is hard to fathom how someone can argue passionately against expanded drilling, but then want to flood the market with oil from the SPR. The only way I can rationalize Romm’s position is if he doesn’t really believe this is a good idea, but is rather just towing the party line. After all, as I have documented, prominent Democrats like Ed Markey and Chuck Schumer have a long history of lobbying for oil from the SPR. Perhaps one of them asked Romm to publicly support this position.

But if that’s the case, sometimes you have have to take a stand for what you believe is right. History shows us that low prices spur demand. Higher demand increases carbon dioxide emissions. So Romm can’t have it both ways, and if he is just being a good soldier than perhaps he should grow a backbone and speak out against this insanity.

Probably the biggest risk in all of this is that OPEC cuts production by the amount we release from the SPR. They are already threatening this. After all, their governments have gotten accustomed to $100 oil; they aren’t likely to act passively if oil prices crash. And therein lies the dilemma: Beyond the fact that tapping the SPR is contrary to the goal of reducing carbon emissions, there is no evidence that the long-term impact will be lower prices. It will, however, mean less insurance against supply disruptions.

Drilling for Crude Oil – in the SPR

This SPR move is but one example of a desire for mutually exclusive goals: Lower gas prices and lower carbon dioxide emissions. Actually, there is another goal in there as well that should be noted. Democrats like Romm believe that if we never drill for more oil, green alternatives will step into the void. This sets up one more set of mutually exclusive goals: Cheaper gasoline and development of renewable energy options. But renewable options are not cheap. This is why they have struggled to displace gasoline. The conflicting goals of Democrats goes a long way toward explaining their often dysfunctional energy ideas. To review, we have:

  • A goal of lower gasoline prices and lower carbon emissions — Mutually exclusive.
  • A goal of lower gasoline prices and renewable fuel development — Mutually exclusive.

The result of these mutually exclusive goals manifests itself in asinine ideas like drilling for oil in the SPR but nowhere else in the U.S.