That Strategic Petroleum Reserve
June 6, 2004
"It's the markets, stupid." The high price of gasoline and oil can be attributed to only one factor. The market is at work. Markets allocate resources to the highest bidder and oil and gas prices are not unique from those eternal laws of supply and demand. The explanation of high energy costs is eternal and simple, too little supply, too much demand or both.
In the present situation supply has been reduced by OPEC's reluctance to increase demand as a response to a declining dollar. For OPEC to attain its desired exchange of dollars for oil it must charge more. This has resulted in a limited overall supply at a time with strong and growing demand. On the demand side of the equation lays the largest culprit of high energy costs. The robust recovery in the United States has created a surge in demand on its own. This surge of demand has happened along with massive increases in oil and gas demand in the rapidly industrializing economies of China and India which are responsible for creating substantial increases in base demand not seen in years. This stress on the demand for oil has created the prices we pay at the pump and any solution to these high prices must be remedied through the forces of supply and demand.
The reduced supply also has a domestic flavor of poor planning and insufficient capacity to meet the forces of demand. However, these inabilities to meet market demand have been imposed by agencies of government, and the solution to these problems lies within government. The supply to the US market is substantial and supply is restricted by an inadequate refining capacity. It was reported by the Wall Street Journal that a new refinery has not been built since 1976 and there are no plans to construct new facilities. Furthermore, it was reported that in 1982 there were 301 domestic refineries, and today in 2004 there are a mere 153. Furthermore, refining capacity is less than demand. We domestically refine 8.2 million barrels a day and consume over 9 million barrels daily.
To remedy the high prices policy makers must take steps to either enhance the refining capacity of each existing facility or build more. Environmental regulations, complex and inconsistent regulations for blend and mixture ratios along with limited domestic supply of crude oil all contribute to the inability to supply at market demand. A simple solution would be to standardize most blend and mixture ratios in fuel to ensure universal compliance and a greater ease of supply at all levels of the supply chain. The solution of any problem which involves markets can only be solved by alterations in supply and demand. As policy makers any solution that does not increase supply or reduce demand will not solve the problem.
Finally, the Strategic Petroleum Reserve was created to insure that oil would continue to flow despite any "catastrophic" disruption of world oil supply. The reserve has acted to enhance the security of America to be certain that even in the case of a major attack or even a radical reduction of oil availability the military and policing agencies of the United States would have those resources available to continue doing their business to protect the homeland. This strategic supply of resources has added to the security of America by allowing for continued policing and military maneuvers in potential times of trouble. That is what the reserve was created for, and now more than ever should remain as.
The recent attempt by 29 US Senators to release the Strategic Petroleum Reserve is as much an insult to American Security as it is to American intelligence. President Bush has ordered the SPR to be filled to the brim of 700 million barrels. This has come at an appropriate time to ensure American sovereignty at a time of turmoil in the Middle East. This tool will leave American hands clean and un-abated to take the best policy decisions for the US and the Middle East.
The desire to release the SPR should also be an insult to the intelligence and common sense of the American people. The SPR accounts for less than .2% of total world Oil Supply. This is such an insignificant amount of oil in the scheme of things that it could never alter supply even temporarily to meet the fundamentals of demand. Put simply, releasing the SPR would lower prices by no more than 2 cents a gallon, and most economists would argue it would have no effect what-so-ever on world or domestic oil prices. This fallacious grand-standing threatens American security to potentially lower fuel prices by no more than a cent or two. Suggesting that any long term fundamentals will change with the release of the SPR is a cheap shot at American Intelligence. So lets use the SPR for its intended use, to protect the homeland, and solve high prices with real solutions that increase long term supply and reduce overall prices. And that is how we see it FROM OUR PERSPECTIVE.