By the premier standard of what government should do in crises of oil and gas supply, the US government has performed fairly well since Hurricane Katrina devastated the Gulf Coast Aug. 29. It has room for improvement, however.
The standard of crisis performance is simple. The government should help the market work. That’s all it should do.
Supply emergency
The US government mostly helped the market work after Katrina forced the shut-in of 95% of the oil production in the Gulf of Mexico and 88% of the gas production, cut electrical power to two arterial product pipelines and one major crude line, and idled or reduced operation of 14 refineries, four of which remain shut down with little prospect for quick return to service. By any measure, disruption of so much production and refining, in a market already straining at the limits of capacity, constitutes a supply emergency.
The government responded accordingly. It made clear, with prompt offers of loaner supplies, that crude oil from the Strategic Petroleum Reserve would be available. The move had two important effects. It provided feedstock to refineries unscathed by the storm but cut off from normal crude deliveries. And it settled a legitimately anxious crude oil market.
The International Energy Agency, of which the US is a member, also showed welcome recognition of a supply emergency. The group’s reluctance to tap strategic inventories 15 years ago, when Iraq invaded Kuwait and snatched 4.5 million b/d of oil out of the market, provided reason for doubt. This time, IEA approved release for 30 days of as much as 2 million b/d of oil, half of it crude from the US and 35% of it product from Europe. With 880,000 b/d of US refining capacity idle, access to supplemental product imports is especially helpful.
The US government did more than prime supply with oil from strategic storage. It also waived product specifications for gasoline and diesel and allowed the temporary sale of off-road diesel for road use. And it suspended the Jones Act to let foreign-flag tankers and barges carry oil between US ports. The moves improved the flexibility of product distribution. In doing so, they accelerated initial recovery work on the Gulf Coast, work that included restoring power to pipelines and refineries so crude and products could flow again to starved markets in the Midwest and East.
All those actions qualify as helping a hobbled market get back to work. They therefore deserve applause. Yet the government acted in other ways as though it doesn’t fully appreciate the importance of market behavior to the restoration of normalcy.
Complaints about price “gouging” from Congress are as predictable as price leaps in times of sudden supply distress. Some lawmakers are simply nags willing to greet emergencies with concocted indignation rather than constructive problem solving. That the empty bluster still fools large numbers of voters is regrettable. This time, however, the whining comes a month after Congress passed an energy bill with a huge, politically motivated mandate for ethanol, which will raise the costs of making and distributing gasoline. So it’s more than the usual demagoguery. It’s outright hypocrisy.
But that’s Congress. From the administration, the nation has reason to expect more sophistication. Alas, the Department of Energy saw fit to stoke the vapid outrage. It established a “gas gouging reporting system,” complete with a toll-free number and promises to report the complaints of angry fuel consumers to authorities for possible prosecution. When governments behave like this, no one should wonder why the US remains so amazingly ignorant about fuels vital to its well-being.
What’s gouging?
DOE at least might have suggested a definition for “gouging.” But, of course, it couldn’t. “Gouging” is whatever an incensed consumer-or a politically ambitious state governor or attorney general-says it is. In fact, opportunistic pricing can’t survive a market that works, the kind of market the government should be promoting. Price leaps and the quick profits that go with them are natural consequences of sudden losses of supply. They help supply and demand recover balance and are, therefore, essential to price relief.
Making that point is a way for the government to help the market work. There will be other supply crises. This one isn’t over.✦
