The American Automobile Association charged bravely onto the wrong battlefield with its request to the Department of Energy for action on oil inventories. In a press release, William Berman, AAA's director of energy and environment, notes that stocks of gasoline and crude oil have fallen to very low levels. "We are not suggesting the oil industry has purposefully manipulated prices," he says, "but we are concerned that lower than normal inventories could put upward pressure on gasoline prices."
In December, therefore, AAA asked outgoing Energy Sec. Hazel O'Leary to "urge refiners to shore up their inventories to protect the nation from unexpected changes that could occur in the marketplace." AAA opposes federal control of oil inventories. Yet O'Leary, Berman says in an unashamed claim to both sides of the point, "could be helpful in efforts to restore reserves to 1994 levels."
Wrong arena
Once again, the federal government has been summoned to an arena into which it should never again stray. Just before winter, three lawmakers from the Northeast wanted DOE to do something about low heating oil inventories. And now this.
If it keeps up, if Congress or DOE acts on any of the current hysteria, the U.S. could end up grappling with real shortage, real voids in the petroleum delivery system, the kind of shortage that only governments can manufacture.
Berman, like the politicians from the Northeast, assumes that refiners somehow set inventory levels as an act of absolute volition. "Refiners," he says, "have dropped their crude oil stocks below 296 million bbl." Far be it from him, of course, to insinuate that they did so to raise prices.
What refiners have been doing, in fact, is what they always do: Satisfying market demand in a manner that makes most economic sense. Until recently, that meant losing as little money as possible making and selling oil products and hoping for compensation from convenience-store sales of potato chips and fountain drinks.
This year, the market has been tight. From production to refining, nearly everything is running at practical limits of capacity. The surplus of production capacity that suppressed crude prices for many years has shrunk. Crude prices have risen. Yet demand, stimulated by economic activity worldwide, has continued to grow.
For now, therefore, oil is zipping through the system. Refining even has been modestly profitable for a few weeks, although far from levels that might encourage anyone to build distillation capacity. Refiners probably wish that they held more crude and product in storage than they do at the moment. But the market provides powerful incentives not to hoard oil. This is altogether appropriate. For the time being, consumers need nearly everything producers and refiners can deliver.
A stockbuild motivated by the government would deflect product from consumers and raise prices-two out of the three most important things that AAA members and other motorists do not need. The other is a federal government stumbling around in an oil market that works best left free.
Real political threats
American motorists face a number of political threats to their interests as fuel consumers. The Environmental Protection Agency proposes to require reformulated gasoline in places that don't need it. The attitude is widespread that any fuel is preferable to gasoline or diesel, even if it's more expensive and less convenient. Tax credits subsidize additives not warranted by commercial or environmental considerations. AAA could serve its members' interests by taking reasoned positions on any of these issues.
But action on the overture to DOE would give oil inventories a political dimension that would very quickly work to the detriment of the people AAA professes to serve. Inventory behavior is reflection of economic phenomena. It should be understood as such and, in the interest of fuel consumers, kept out of the reach of government.
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