“We will not play politics with the Strategic Petroleum Reserve (SPR),” said President Bush. That was applauded by several columnists and by editorials in the Wall Street Journal and the New Republic. There may be good reasons to keep filling the SPR, but political purity is not one.
The Energy Department Web site (www.eia.doe.gov) provides a chronology of oil market events since 1970. The entry for Jan. 16, 1991, says, “President Bush directs drawdown of Strategic Petroleum Reserves (33.75 million barrels). Crude oil prices drop $9-$10 per barrel in one day.” Was that just playing politics? If the first Iraq war was a sufficient reason to tap SPR, why not the second Iraq war?
Insinuations that President Clinton “played politics” with oil reserves misconstrue what happened in 2000. An Indianapolis Star editorial said: “In an effort to help Al Gore get elected four years ago during a similar price spike, Bill Clinton dumped 30 million barrels of oil from the reserve onto the markets. Although it temporarily cut the price of a barrel of oil from $37 to $30, the price quickly returned to about $36 a barrel.”
That story is understandably popular with Republicans, but biased. As early as March 7, 2000, the price of West Texas Intermediate crude oil had already topped $34, the highest in nine years. The stock market began to tumble in April, perhaps coincidentally. By May, the industrial production index for energy-intensive high-tech industries was in a tailspin, falling 3.8 percent in the third quarter.
By July, all industrial output was rapidly contracting. This was exactly the sort of situation the SPR was meant to prevent. Yet nothing was done until late September, the end of a quarter in which real GDP fell.
On Sept. 20, 2000, oil hit a 10-year high of $37.80 “amid an increase in tensions between Iraq and Kuwait.” Two days later, “President Clinton authorizes the release of 30 million barrels of oil from the Strategic Petroleum Reserve over 30 days.” Crude fell to $32.68 that day and remained down until the terrorist attack on the USS Cole on Oct. 12 — just 10 days before the SPR drawdown had been pre-announced to end.
The self-imposed 30-day limit was like going into battle with oil speculators after announcing you’re out of ammunition. Oil spiked to $36 on the day the USS Cole was bombed, so that is where Mr. Clinton’s critics conveniently end their story. They neglect to mention oil fell to $21.50 by Christmas.
The Clinton administration made a strategic blunder by disclosing just how much would be sold each day and when the sales would stop. To keep speculators off balance, neither the maximum daily amount to be sold nor the duration of sales should be disclosed. That is also the fatal flaw in the plan of New York’s Democratic Sen. Charles Schumer, to release 1 million barrels of oil per day for 30-60 days. That is like playing poker with all your cards showing.
On Nov. 6, 2001, the price of oil fell below $20. Seven days later, President Bush announced the government would start filling the reserve (originally intended to be 400 million barrels) from 545 million barrels to its maximum capacity of 700 million. The reserve is now up to 660 million, and nobody is talking about selling more than 5 percent to 10 percent of it.
Nobody has accused Mr. Bush of playing politics with the SPR by artificially boosting demand to, say, benefit Texas oil producers. But if selling reserves is henceforth presumed to be politically motivated, why isn’t buying reserves equally suspect? Low oil prices are good for companies that buy energy, but high prices are good for companies that sell energy. And both interest groups have ample political clout.
The National Corn Growers Association sees high gasoline prices as a marvelous opportunity to lobby for even more ethanol subsidies.
Those viewing the SPR as untouchable invariably change the subject from oil to gasoline. “Factored for inflation,” said the Indianapolis Star, “gas in this country is not all that expensive relative to historic norms.” That means gasoline was $2.84 in 1981, measured in today’s dollars. This is an odd argument, since 1980-82 had the worst stagflation in U.S. history.
In any case, economists worry not about gasoline but the energy cost to important industries like airlines, trucking, agriculture, petrochemicals, aluminum, silicon chips and paper. James Hamilton’s study in the April 2003 Journal of Econometrics concluded: “It is quite clear from the data that oil price increase… have proven highly disruptive to the U.S. economy.”
The Wall Street Journal takes comfort that energy-intensive industries now account for a smaller share of the economy. We used 14,400 Btus (British thermal units) per dollar of real GDP in 1981, but only 11,900 in 1991 and 10,100 in 2000. Yet the economy still slipped into recession soon after oil prices spiked above $35 in 1991 and 2000, just as in 1981.
The Energy Department entry for Nov. 13, 2001 — the day President Bush began expanding the reserve — rightly explained that, “The Strategic Petroleum Reserve is intended, in the short run, to smooth out price spikes.” Shortly after the SPR was established, President Ford likewise warned Congress on Feb. 16, 1976, of the “vulnerability to the economic disruption which a few foreign countries can cause… by arbitrarily raising prices.” Those who now claim the SPR had nothing to do with price spikes and economic disruption have reconstructed legislative history.
The Energy Department’s Short-Term Energy Outlook says, “Oil price declines are expected in 2005 as Iraqi oil production continues to increase and inventories are rebuilt toward more normal levels.” If so, it makes sense to sell reserves at today’s high prices and replace them at a lower price next year. An International Energy Agency official complained doing so would put Uncle Sam in strategic competition with speculators.
Indeed it would. The point of tossing some SPR worries into the futures market is to make it much riskier for speculators to bet sudden oil price changes can occur only upward.
The Wall Street Journal thinks it nonetheless imprudent to sell federal oil reserves when oil prices are high, because doing so would discourage private stockpiling for emergencies. That is a much better argument against having a Strategic Petroleum Reserve than against using such a reserve.
If current wisdom dictates that presidents avoid selling oil from the SPR during election years (because that could be construed as playing politics), and also avoid selling if the oil price is too high (because that could discourage private stockpiling), it follows the SPR could only be used during nonelection years and only if oil was already cheap.
Since these popular arguments against using the Strategic Petroleum Reserves obviously render the SPR completely useless, the whole reserve might as well be sold to private investors who would then react logically to the normal, nonpolitical incentives to buy low and sell high.
Alan Reynolds is a senior fellow with the Cato Institute and a nationally syndicated columnist.