Cracking The Oil Debate: What To Do With The SPR?

Social unrest in the Middle East is leading to increased uncertainty in foreign oil and energy markets, with the result being renewed discussions about whether or not this is the appropriate time to tap the Department of Energy's approximately 727 million barrel strong Strategic Petroleum Reserve. According to the WSJ, Democratic parasite-politicians pleaded in a letter to the White House to consider the use of the SPR in light of the approaching summer driving season. Meanwhile, Daniel Yergin, "energy expert" and author of the critically-acclaimed book The Prize: The Epic Quest for Oil, Money & Power, has warned against drawdowns in the SPR, arguing that it is "unwise for the U.S. government to get in the business of price controls."

So, who is correct in this debate? For frequent readers of my commentary here at EPJ, it will likely come as little surprise to know that both sides of the debate are wrong because they're offering a false dichotomy to observers.

Let's take a step back for a moment. The question to be asking in this situation is not, "Given that we have the SPR, how should we utilize its resources?", but rather the question that should be asked is, "Why do we have an SPR in the first place?" or even better, "Should the US government be in the business of establishing something like the SPR?"

Sometimes it's hard for people to see issues like this as clearly as they should because the whole topic has been clouded by politics, which fools observers into thinking such decisions should be made according to arbitrary opinions and pragmatic political concerns. While the resources in question are indeed controlled by political bodies, the problem we are confronted with is, as per usual, economic in nature. At root, the Yergins of the world are arguing, This is not the appropriate/most economically efficient way to utilize the oil in the SPR, while the self-serving Democrat parasite-politicians are arguing, Given the potential alternative uses of the SPR, using some of it to try to keep oil prices down so my constituents don't raise hell with me is the appropriate/most economically efficient way to utilize the oil in the SPR.

But both of these arguments are backed by nothing other than the opinions of the people who put them forth. The reality is that the best use for the oil in the SPR, the one that would make the most economic sense, would be the individual decisions made by end consumers of the oil on the free market. Some individuals might decide to consume the oil immediately by using the oil to fuel their cars; others might choose to use some of the oil as a current capital good to fabricate petrochemical derivative products; still others might decide to transform some of the oil into a long-term capital good by storing it for later use (this is also known as "saving").

Who is Daniel Yergin, or the Democrat "lawmakers", to tell any of these people they are right or wrong for preferring to use the oil as they see fit if they're willing to pay the going price to obtain it?

Instead, we have the worst of all worlds, where the SPR is actually contributing to the very problem it was nominally established to defend against-- oil supply uncertainty and the threat of rising prices. In the grand scheme of things, the SPR's reserve capacity is somewhat laughable. Despite $4B cost of constructing the large, underground salt dome caverns used to store the oil (gee... why pay oil companies to pull their oil out of the ground in one place if it's just going to be put right back into the ground somewhere else at enormous cost?), the SPR only holds enough oil to supply the US for 34 days, at current rates of consumption.

Still, at current oil prices of nearly $100/bbl, that is $72.7B worth of oil being withheld from the market. With supply constrained thusly, prices are that much higher than they would be. Didn't Daniel Yergin say something about how the US government shouldn't be in the business of price controls? Seems like it's too late for that.

As for uncertainty, there's almost zero visibility for investors and consumers of oil as far as what conditions would elicit a decision from the DoE to release some of the oil in the SPR and thus "stabilize" supply. No visibility, that is, unless you're a major oil company. Take a look at a small list of disclosed drawdowns in the SPR available on Wikipedia. How many of those sound like emergencies to you, worthy of tapping into the country's "strategic" reserves?

Now, remind yourself that that's just your opinion, and it's bound to be different from your neighbor's, Daniel Yergin's, vote-hungry Democrat parasite-politicians and even the Big Kahuna, El Presidente, himself. It's all arbitrary. There is nothing scientific or objective about this decision-making process and it's ultimately finalized by the person with the gun (that is, not you).

This isn't planning. It's not strategy. It's whimsical, authoritarian chaos. National strategic petroleum reserves are tools of the State for fighting future wars, winning votes and rewarding politically-connected oil corporations and other members of the elite. They're not for you and me to dip into when we want to go on a summer road trip and Libya happens to be experiencing a revolution.

The SPR and other national reserves like it are a disgrace to "free energy markets" everywhere and they should be ended immediately. All oil to the people, and let them pay for it what they will!

Mubarak: "So Long, And Thanks For All The Fish!"

A good read over at the blog of Pater Tenenbrarum, pseudonymous "blogfather" to Mike Shedlock, on the latest capers in Egypt:

One day later – poof! – no more Mubarak. He's gone - and with him, his loot. As some enterprising journalists and bloggers have in the meantime found out (estimates for the total he 'earned' for his family have by now been raised to 'between $62 and $72 billion', which seem nicely spread over all the places where tinpot dictators these days like to keep their plunder), the total amount appropriated by the Mubarak clan is roughly similar to the entire US 'aid' Egypt has received in the period since it has become a US client state, courtesy of unwitting US tax cows.

Phew! What a relief! Dear US tax cows, you may breathe easier now. Your money did not, after all, finance a tyrannical regime of torture and terror. Instead you merely financed Mubarak's personal piggy bank! They did the rest all by themselves. Any disquietude that may have invaded your minds, any slight stirring of the conscience upon hearing that Egypt was not the nice place you thought it was – it can all be safely sent back to the deep slumber it was in previously.

Meanwhile, Egypt's military has taken over the State apparatus in Egypt, has suspended the constitution entirely and is promising elections within six months. We'll see what becomes of that, won't we? As we related previously, the Egyptian army is in the main a business. It runs resorts, it has its fingers in manufacturing, in fact it has business interests all over the show. Whatever happens next, the army will want to protect these interests.

My thoughts exactly. I am glad Robert Wenzel has been working hard to point out to EPJ readers that the fate of the average Egyptian going forward is going to be complicated because they have no real, consistent freedom ideology to replace the power vacuum left by their recently departed strong-arm dictator.

I'm no fan of written constitutions by any means but I find it kind of strange that no one seems all that concerned about the Egyptian army suspending theirs-- wouldn't one be able to accurately call the "anything goes" legal environment that follows such an act a military dictatorship? It's not like the military in Egypt has a monopoly on angelic intentions and kind governance. Mubarak, after all, originally hailed from that storied institution.

As Gob Bluth might say, Egypt appears to be returning from whence it came.

Two Intellectual Heavyweights Body Slam The MIT Economics Establishment

EPJ's own Dear Leader, Robert Wenzel, recently remarked upon what happens when economists go stupid. Now, Minnesota financial blogger Eric Falkenstein has weighed in on the matter and it appears he's decided to be fighter number two to Wenzel's growing tag team:

Unfortunately Keynesians don't have any intuition for this, because everything's all just 'aggregate demand', not housing, technology, energy, etc. Aggregation leads to simplifcation, but clearly it has a cost, and I think any macro theory that ignores the fact that an economy is a network of firms and individuals is pointless.

Hayek's early work on business cycles focused on misalignments in the structure of production. Alas, this was basically impossible to formalize. Keyenes's model, meanwhile, was adopted into the Hansen-Hicks synthesis that looked a lot like the simple Supply/Demand equations economists were used to, so everything seemed copacetic. A bad idea, in a tractable model, has a long life, because everyone forgets about all the hand waiving assumptions that underlie such models.

There's more, and Falkenstein is even partial to Wenzel's patented "Bottom line:" summary finishing move.