A plan to double capacity of the Strategic Petroleum Reserve typifies the cascading misjudgment driving US energy policy. In his state-of-the-union address Jan. 23, President George W. Bush announced plans to raise capacity of the SPR to 1.5 billion bbl by 2027. In the same speech, he proposed that the mandate for renewable fuel sold with gasoline, now set to grow to 7.5 billion gal/year by 2012, be expanded to 35 billion gal/year by 2027. In conjunction with an unspecified toughening of fuel-economy standards for new vehicles, this is supposed to cut US consumption of gasoline over the next 10 years by 20% from projected levels.
The administration’s rationale for expanding the SPR illustrates recklessly incomplete thinking. A White House fact sheet accompanying the president’s address notes that the 691 million bbl of crude oil now in the SPR would cover net imports for “only” 55 days. This it compares with the 118 days of calculated import coverage of 1985, when the SPR contained 493 million bbl. The arithmetic does not establish that 118 days is an optimum level of import coverage. It does not account for changes that the oil market has undergone since 1985. And it does not explain why import coverage should determine how much oil the government holds in noncommercial inventory or-most importantly-would be willing to pay for.
‘Insurance policy’
The administration’s fact sheet redundantly calls the SPR “an insurance policy in the event of a severe supply disruption, such as from a natural disaster or a terrorist attack, in the energy supply chain.” The US has sustained natural disasters and terrorist attacks, not one of which has come close to testing the drawdown rate or duration limits of the SPR at its current size. To argue that the inventory needs to grow on these bases is specious.
The SPR’s main historic value in fact has been to discourage major exporters from manipulating oil supply to influence global politics. In the decade or so after the Arab oil embargo of 1973-74, the argument for hoarding crude oil as a geopolitical counterbalance carried weight. If anything, subsequent market changes have weakened the case.
Development and population growth have made exporters more dependent on oil sales than they were in the 1970s. Furthermore, the market is much more flexible than it was then and better able to accommodate disruption. The oil export weapon, therefore, isn’t what it used to be. The energy policies of major importing nations should have adapted to these changes long ago.
A new look at the SPR, not a random expansion, is in order. The government should assess drawdown capacities against supply disruptions of the size and nature that might really occur. Then it should examine the costs of buying oil that no one can do anything with except under extreme conditions. Those costs are considerable. A realistic assessment might well conclude that the US has more protection than it needs against probable supply jolts and that the SPR should shrink. The willy-nilly assertion that the strategic inventory needs to double looks like a fiscally irresponsible distraction from serious energy policy-making.
Raising costs
But cost receives little attention in Bush’s energy plan. The government can’t lower consumption of gasoline without raising costs through new taxes or substitution of something more expensive. Bush has chosen the latter, politically easier course, which camouflages the costs. In case anyone has forgotten, the Energy Information Administration has calculated that ethanol, at the substance’s current level of subsidy, deprives the federal treasury of 44.9¢/gal. Ethanol production is raising the price of corn. And ethanol distribution will keep pressure on the price of diesel. Expanding the mandate will multiply the economic damage.
The US enjoyed a couple of good decades during which markets set fuel prices and the main government intrusions were government-imposed limits on supply. To the peril of consumers and taxpayers, the government is reentering the energy business, raising costs needlessly under several dangerous pretenses, prominent among which is the assertion that political leaders know how much energy people should use.