The high price of gasFollow

Oil Reserves and Politics
by Alan Reynolds

Alan Reynolds, a nationally syndicated columnist, is a senior fellow at the Cato Institute.

The Organization of Petroleum Exporting Countries (OPEC) agreed to cut production targets by 4 percent. White House spokesman Scott McClellan said, "The United States continues to emphasize that oil prices should be determined by market forces."

But the OPEC oil cartel is one of those "market forces." And so is the U.S. Strategic Petroleum Reserve (SPR).

Since November 2001, the U.S. government has been adding about 160,000 barrels a day to the 651 billion barrels already stockpiled in the SPR. During that time, oil prices rose from less than $20 a barrel to as much as $37. The Energy Department can't resist a bad bargain and plans to buy another 202,000 barrels a day in April. Some 55 members of the House of Representatives wrote to the president earlier this month urging the administration to stop adding to reserves.

Sen. John Kerry, Massachusetts Democrat, also seized this opportunity. "The Bush administration has put [the SPR] program on automatic pilot without regard to the short-term effect on the U.S. market," the Kerry campaign said.

Mr. McClellan responded by telling reporters selling reserves "would have a negligible impact." But that assumes only negligible amounts would be sold.

Leaving the impression it is willing only to add to the petroleum reserve and never to sell, the administration created too easy a bet for oil traders. As a reformed currency speculator, I know the allure of options is the leverage: You can quintuple your money if the price goes up, or lose it all if the price goes down. But that lose-everything downside also makes speculators panic if prices even wiggle in the wrong direction.

Talking to Reuters about the OPEC decision, Gary Ross of PIRA Energy said, "This decision is only going to encourage the speculators to stay long on oil markets." But as President Bush I proved, it isn't hard to make speculators run for the exit.

On Jan. 17, 1991, the elder President Bush publicly announced he had authorized the Energy Department to sell as much as 2.5 million barrels a day from the strategic stockpile. That would be like adding another Iraq overnight.

The Washington Post reported what happened next: "Oil prices tumbled in London today, defying nearly unanimous predictions prices would skyrocket once war broke out in the Persian Gulf. After jumping $7 a barrel to nearly $40 in the first hour of the war, prices on world markets began to tumble. By midday, the price of benchmark North Sea Brent crude had dropped to near $21 a barrel." A follow-up story said, "The dramatic sell-off to $21.44 shocked traders and led several oil companies to announce immediate price cuts."

Cutting oil prices in half was not a negligible effect; nor was it temporary. Oil remained at or below $20 until late 1999. Ironically, the United States did not even have to sell much oil. The announcement alone was enough to shock traders, forcing them to liquidate futures and options for whatever they could get. They never found out if the president was bluffing. But they knew he had a lot more oil than they did.

Mr. McClellan reiterated the current Bush administration's position that not a drop of reserves should ever be touched except "in the event of a severe disruption of supply." The implication is false that the reserve was designed only for use in a severe national security crisis. After a poisonous brew of price controls, devaluation and inflationary monetary policy exploded the prices of oil and every other commodity in 1973-74, the U.S. public was sold on using tax dollars to build a petroleum reserve.

The public was told the reason was to prevent another economic disruption from OPEC mischief. This was not to be a military petroleum reserve (which we already had), but an economic reserve. It was intended as a buffer stock -- to counteract the economic damage of periodic surges in the price of oil by buying low and selling high. Yet the administration now insists on buying high and not selling at all.

This has always been an endemic problem with government-run commodity stockpiles. Politicians and bureaucrats are sure to be deluged with advice from industry-financed experts peddling ingenious reasons to keep buying when prices are very high and to never sell.

Gasoline prices now appear to be the only political lightning rod, but that is an illusion. The more serious risk for the economy comes from rising energy costs and falling profits for energy-intensive manufacturing, airlines and agriculture. And states most dependent on heavy industry and farming are among the key battleground states.

We have had enough unpleasant experience with oil price spikes to make us more cautious. Oil was below $15 in January 1979, but reached $35-40 from February 1980 through October 1982 as the economy grappled with severe stagflation. Oil was back down to $17 by the start of 1990, but the economy went into recession when oil topped $27 in August and reached $36 by October.

Oil was again well below $20 for most of 1997-99, yet back above $30 from June to November 2000, when U.S. industrial production began falling. Oil was again below $20 at the start of 2002, but back above $37 lately.

The Energy Department Web site says the reserve is to be used for "economically threatening disruption," and the threat of economic disruption can only be gauged by price. I do not think the latest rise of oil prices is nearly enough to tank the economy. But it is not a bit helpful, even if it doesn't last long. Temporary spikes in energy costs can provide an incentive to postpone industrial expansion, or even to cut back and wait.

With nearly 700 million barrels of oil in its war chest, the United States is quite capable of giving OPEC a bloody nose. Far from being a well-disciplined cartel, most OPEC producers would scramble to "make hay while the sun shines" by maximizing production if they feared the United States might flood the market, even for short while.

The U.S. government should simply let it be known that significant yet undisclosed sales of petroleum reserves are by no means out of the question. That would scare OPEC a little, and it would scare oil traders a lot.

This article was published in The Washington Times, April 4, 2004.

Bush in '00 running for Office "I think the President shuold call up Opec and tell them to open the spigots"

Bush in '04 begging the Saudi's for more money "Do you put it in first, or use the lube first?"

Get used to it. Anyone who didn't buy oil futures when Bush took office was an idiot.

The Strategic Petroleum Reserve was created by congress at the start of the cold war, in the eventuality that the United States was faced with a global conflict where supplies lines would be dramatically affected. The original intent was to use the reserves first for military purposes and second for commercial/industry use.

After a poisonous brew of price controls, devaluation and inflationary monetary policy exploded the prices of oil and every other commodity in 1973-74, the U.S. public was sold on using tax dollars to build a petroleum reserve.

The public was told the reason was to prevent another economic disruption from OPEC mischief. This was not to be a military petroleum reserve (which we already had), but an economic reserve. It was intended as a buffer stock -- to counteract the economic damage of periodic surges in the price of oil by buying low and selling high. Yet the administration now insists on buying high and not selling at all.

The United States started the petroleum reserve in 1975 after oil supplies were cut off during the 1973-74 oil embargo. The embargo was a shock to the U.S. economy, and the government decided that the country should never be caught short again. The United States uses almost 19 million barrels of petroleum every day, and more than half of that oil comes from imports. A reserve of 60 days' worth of petroleum could help keep the oil flowing in case of a cutoff. The last time that the United States used oil from the reserve was during the Persian Gulf War in 1991 to keep oil plentiful and prices stable. That drawdown is different from the exchange authorized recently because the companies who bid for it will return the oil this time.

The need for a national oil storage reserve has been recognized for at least five decades.

Secretary of the Interior Harold Ickes advocated the stockpiling of emergency crude oil in 1944. President Truman's Minerals Policy Commission proposed a strategic oil supply in 1952. President Eisenhower suggested an oil reserve after the 1956 Suez Crisis. The Cabinet Task Force on Oil Import Control recommended a similar reserve in 1970.

But few events so dramatically underscored the need for a strategic oil reserve as the 1973-74 oil embargo. The cutoff of oil flowing into the United States from many Arab nations sent economic shockwaves throughout the Nation. In the aftermath of the oil crises, the United States established the SPR.

President Ford set the SPR into motion when he signed the Energy Policy and Conservation Act (EPCA) on December 22, 1975. The legislation declared it to be U.S. policy to establish a reserve of up to 1 billion barrels of petroleum.

The Gulf of Mexico was a logical choice for oil storage sites. More than 500 salt domes are concentrated along the coast. It is the location of many U.S. refineries and distribution points for tankers, barges and pipelines. In April 1977, the government acquired several existing salt caverns to serve as the first storage sites. Construction of the first surface facilities began in June 1977.

I like having the ability to put the entire weeks camping gear inside and still have room for 5 people. I like having the ability to not get stuck in the snow. I like being able to go off-roading. I like being able to tow the boat or the snowmobiles. For that, I pay the price. But I will be *** ****** if I will listen to some whiney little liberal **** telling me that "SUVs are bad" or some such bullsh1t.

After a poisonous brew of price controls, devaluation and inflationary monetary policy exploded the prices of oil and every other commodity in 1973-74, the U.S. public was sold on using tax dollars to build a petroleum reserve.

The public was told the reason was to prevent another economic disruption from OPEC mischief. This was not to be a military petroleum reserve (which we already had), but an economic reserve. It was intended as a buffer stock -- to counteract the economic damage of periodic surges in the price of oil by buying low and selling high. Yet the administration now insists on buying high and not selling at all.

On Jan. 17, 1991, the elder President Bush publicly announced he had authorized the Energy Department to sell as much as 2.5 million barrels a day from the strategic stockpile. That would be like adding another Iraq overnight.

Cutting oil prices in half was not a negligible effect; nor was it temporary. Oil remained at or below $20 until late 1999. Ironically, the United States did not even have to sell much oil. The announcement alone was enough to shock traders, forcing them to liquidate futures and options for whatever they could get. They never found out if the president was bluffing. But they knew he had a lot more oil than they did.

Sen. John Kerry, Massachusetts Democrat, also seized this opportunity. "The Bush administration has put [the SPR] program on automatic pilot without regard to the short-term effect on the U.S. market," the Kerry campaign said.

And if some tree-huggin bastid wants to give me **** for driving an SUV, they can go to hell. And I'll drive by waving while smoking a cig and throwing my non biodegradable fast food container out the window.