A Rice University think-tank said the US government should require the oil industry to maintain “average minimum gasoline inventories” to prevent emergency supply shortages and price spikes that occurred after hurricanes hit the Gulf Coast in 2005 and 2008.
That is arguably the most unusual of seven proposals for US gasoline policy included in a series of focused policy recommendations for President Barack Obama’s administration issued at the end of January by the Baker Institute for Public Policy on the Rice campus in Houston.
The proposal provides no details of the mandated inventory program other than it would be “similar to what is currently done in Europe.” However, it said, “A minimum gasoline inventory level for industry makes more sense than federal government-held stocks because of the physical specifications for gasoline, which has a shorter shelf life than crude oil. Thus, gasoline inventories would need to be cycled over time, but this can be done easily by industry so long as there are prespecified sustained minimum levels.”
The proposal does not stipulate the minimum amount of inventory necessary to respond to an unexpected emergency, nor does it say whether the inventory should be centrally located or spread among refiners, jobbers, and retail outlets.
It’s not clear whether stockpiles of extra gasoline would be limited to the Gulf Coast where Hurricanes Katrina, Rita, Gustav, and Ike came ashore. It doesn’t suggest how far inland extra inventories of gasoline would be required to fuel evacuations from the coast, nor does it note whether similar inventories would be required in parts of California prone to wildfires and earthquakes or along the Mississippi and other rivers where flooding sometimes occurs.
It also doesn’t address the problem of accessing those inventories if the electrical power is off, roads are blocked by debris or water, and civilian employees decide to evacuate their families instead of reporting to work as military and government emergency teams are required to do.
Possibly dual inventories of reformulated and conventional gasolines would be required, depending on the time of year and location of the emergency. Institute officials did not respond to multiple requests by OGJ for additional details of the proposal.
A federal requirement to maintain a certain level of inventory means additional expense for the industry, the report acknowledges. But, it said, “This cost would be offset allowing a small price markup that guarantees a rate of return, much as regulatory agencies permit in the power generation and natural gas industries.”
Other proposals
The study recommends that the Obama administration take additional steps in formulating a national gasoline policy:
- Raise the US corporate average fuel efficiency (CAFÉ) standards to 50 mpg.v Negotiate an international CAFÉ standard among major oil-consuming countries as part of a global climate agreement.
- Phase in a higher federal gasoline tax to maintain conservation gains.
- Establish a special diplomatic energy envoy to China.
- Increase federal spending on new energy technologies, energy efficiency, and alternative energy.
- Avoid “overly complex” policies to restrict carbon in the transportation sector, such as a national low carbon fuel standard.
High and rapidly fluctuating gasoline prices are a problem for low-income and middle-class US residents and by transport-dependent businesses, the study said. Last summer when retail US gasoline prices averaged $4.11/gal at the pump, families earning less than $15,000/year were spending as much as 15% of their household income on gasoline—“double the proportion just 7 years earlier,” said Baker Institute officials.
With domestic oil production in general decline since 1970, the US is more dependent on foreign oil than ever. It imported 13.5 million b/d or 65% of total consumption in 2007, up from 35% of US consumption in 1973. “US oil demand is up by almost 20% over demand in 1973,” institute officials reported.
They said the US alone accounted for 45% of the increase in global oil trade in 1990-2005. This allowed the Organization of Petroleum Exporting Countries to “increase its share of the global market from 38% in 1990 to 43% in 2005—a market share not seen since 1980” at the peak of the last major oil boom, they said.
“To the extent that the US—or some group of large oil-consuming countries—takes actions to reduce oil demand, it can lower the market price and reduce the monopoly power of key oil-producing countries, some of whom may have hostile intentions towards the US and its allies,” said the Baker Institute report.
Yet when the 1979-80 oil boom went bust in 1981, with oil prices plummeting by 1986 to the lowest levels in decades, the first source of oil eliminated was not OPEC production with its advantages of large reserves and low lifting costs, but the marginal high-cost, low-production stripper wells in the US.
Once shut in, most of those stripper wells could not be returned to production and therefore were lost forever. More oil then had to be imported to make up for that loss.
Hard line on energy cuts
The study takes a hard line on reducing energy use apparently in spite of possible consequences.
“The new 35 mpg fuel efficiency standard will shave 2.3 million b/d from US oil demand by 2020,” it said. “We must not undo this regulation because Detroit has fallen on hard times. Pushing for a more ambitious target of 50 mpg could save as much as 7 million b/d of oil over what would be consumed if we did nothing,” it said.
However, organized labor is still a strong element of the Democratic Party, and ignoring “hard times” among auto workers may conflict with Obama’s campaign promises to stop the layoffs and put more people back to work.
The report noted many governments in Europe and Asia have kept gasoline demand flat and funded social programs via “hefty consumer taxes” on oil and petroleum products. A similar policy would give the US government more money to repair aging roads and bridges while making it more expensive for motorists to use those facilities.
The additional tax income also would fund rebates to lower-income households to offset the regressive effects of the tax. Perhaps rebates will act as subsidies so the poor can buy as much gasoline as the middle class.
The Baker Institute suggests “a gradual phase-in of a higher gasoline tax” so consumers will have time to adjust to the additional cost at the pump. OPEC members have long complained of consumer nations that heavily tax fuels while blaming the cartel for high oil prices.
Abdalla Salem El-Badri, OPEC’s secretary general, recently said, “Raising taxes can be to the detriment of both oil producers and consumers. From the consumer’s perspective, higher taxes translate into higher prices at the pump. This impacts individuals and does little to instill consumer confidence in the current economic climate. For producers, higher taxes create further uncertainty for long-term planning in an already distorted price environment and volatile market.”
Moreover, would a Congress that was talking a few months ago about temporarily lifting the federal tax on gasoline when pump prices were $4/gal be willing to risk reelection by hiking those same taxes?
While the US would like to reduce oil imports and improve its trade balance, oil is the primary source of income for several producing countries, generating revenue to finance public and social programs.
Saudi Arabia and Venezuela have said they need higher oil prices—around $75/bbl—to maintain their economies. And most of the OPEC and non-OPEC countries are producing at full capacity, so they can’t bring more crude on stream.
However, OPEC has again proven in recent months that it can reduce crude production faster than the US can reduce crude consumption, halting a sharp drop in oil prices.
More research spending
The Baker Institute also suggested: “More aggressive research and development spending—particularly in electricity storage and transmission—could facilitate a switch to hybrid plug-in electric automobiles that tap renewable energy as a fuel source to compete with conventional gasoline.”
It also would require more power plants burning fossil fuels to meet the enhanced demand for electricity.
“The existence of viable alternative energy technologies creates an incentive for oil producers to avoid price shocks and supply disruptions for fear that the new technologies would be more rapidly adopted, permanently displacing oil use,” said the study. However, it does not explain how fear of losing market to alternative fuels will help the industry avoid supply disruptions caused by hurricanes that break pipelines and flood refineries or against attacks by rebels in Nigeria and Iraq that disrupt oil exports.
The Baker Institute report complained that the US lacks domestic refining capacity to meet rising summer demand, making the US market more dependent on gasoline imports and increasing the risk of summer price spikes. No new grassroots refinery has been built in the US in some decades because it has proven almost impossible for the industry to get past antipollution laws, resistance from conservationists, and the prevalent “not in my backyard” syndrome.
Because the rise and fall of China’s economy affects energy supplies and prices, the institute said a senior US diplomat “with energy experience” should be named to a new post as energy diplomacy liaison in Beijing. That liaison “could report to the vice-president, who could take a diplomatic lead on a high-level US-China dialogue much the way [former US Vice-President] Al Gore and Victor Chernomyrdin [then Russian prime minister] discussed US-Russian energy cooperation in the 1990s, paving the way for US-Russian joint investment in major energy projects,” said institute officials.
