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!