Questions about SPR

The U.S. Department of Energy will breathe new life into old questions when it seeks public comments on the Strategic Petroleum Reserve this autumn.

DOE is worried about recent sales of SPR crude conducted for reasons other than supply emergencies. Rightly so. The government set up SPR as a buffer against emergency supply disruptions.

Although there has been no such emergency or even the prospect of one this year, DOE has been ordered to tap SPR twice. In February, stocks at the leaking storage cavern at Weeks Island, La., were withdrawn and sold. Proceeds paid for closing the site; volumes weren't replaced elsewhere. In May, President Clinton ordered sale of 12.8 million bbl of SPR crude to moderate an oil price surge and raise money for federal education programs.

What's more, Congress is considering another SPR crude sale to fund program maintenance. And Clinton's deficit-reduction plan includes a large sale in 2002.

Cushion or piggy bank?

DOE thus has good reason to wonder whether it should manage SPR as the strategic cushion it was designed to be or as a federal piggy bank. With reauthorization due on the President's authority to order withdrawals, it's a good time to ask whether taxpayers should continue paying for an insurance policy about which their government seems confused.

A problem with SPR has been popular and sometimes official reluctance to tap hoarded supply until measurable shortages appear, which they never do unless governments create them. In supply emergencies, prices rise, demand shrinks, and new supply emerges from sources previously on the economic margin.

If it is against the measurable voids of economic mythology that the U.S. wishes to insure itself, the government should liquidate SPR stocks now and simply let the market work. The imagined threat will never occur.

More-realistic reasons to maintain and draw oil from strategic stocks are to 1) discourage exporters from using oil supply as a political weapon and 2) ease the economic disturbance created by market adjustments to sudden supply disruptions, which do happen from time to time. Triggers for dispensing hoarded oil should be truly observable signals: the disrupting event, surging prices, and retreating demand.

Even when the government sets realistic expectations and properly defines deployment parameters for it, however, the SPR can never play more than a secondary role in the national interest it is supposed to serve-energy security. Oil supply, the key element of energy security now and well into the future, is the sum of domestic production and imports. Security depends on the continuity of both. As domestic production declines and demand increases, the importance of imported oil grows.

This is not the grave threat it so often is made out to be and certainly not one to which the U.S. should make great economic sacrifice. More than ever before, the international oil market is open, flexible, and diverse. It responds quickly to natural upsets and penalizes political mischief. For buyers, assurance about the continuity of supply-security-derives from the economic need of oil sellers to sell oil. Free and open trade ensures that everyone responds to that compulsion. Trade, therefore, should be a towering priority of countries, such as the U.S., to which oil supply is vital.

Refusing to trade

Yet the U.S. now refuses to buy oil from several key exporters with which it has quarrels. The practice is economically self-sacrificial, internationally unpersuasive, and-in terms of the security of energy supply-strategically backward. Compounding the supply detriment is long-standing U.S. refusal to seek maximum yield from the domestic petroleum resource.

Ultimately, the question is whether to keep or close a costly cushion of oil. By compromising the primary dimensions of supply, the U.S. has squandered much of its room to choose.