Commentary: Keep The Lid On The Strategic Oil Reserve

With oil prices more than $37 a barrel, tapping the Strategic Petroleum Reserve seems like a no-brainer. The U.S. has 570 million barrels of crude sitting idle in salt caverns in Texas and Louisiana, enough to cover all U.S. imports for more than two months. So why not pump some out? What's wrong with a maneuver that could knock some wind out of the oil cartel, relieve consumers, and guard the U.S. from oil-induced stagflation?

Already, the word is that President Clinton is edging closer to a possible release of oil from the reserve. "I'm studying this very closely," he said on Sept. 19. At the same time, the Senate is expected to pass a bill allowing a President to lend oil from the reserve under conditions well short of a national emergency. Under it, the President could act preemptively, not just after a problem has occurred. And he could act even if a problem is regional, not national. A similar bill has passed the House, and Clinton is expected to sign it by the end of September.

Even without the new law, Clinton conceivably could release oil from the Strategic Petroleum Reserve. Current law lets him release oil in case of a "supply reduction of significant scope and duration coupled with a severe price increase likely to cause a major adverse impact on the nation's economy." The question is, should he do it? If he wants Vice-President Al Gore to get elected, maybe yes. But if his concern is the long-term welfare of the country, probably not.

Here's why. If the U.S. cracks the reserve now, there will be less on hand in case of a real emergency. Today, despite high fuel prices, the U.S. enjoys healthy growth and low inflation. Even New England--ground zero for costly heating oil--is resilient heading into the winter. In its Beige Book report on Sept. 20, the Federal Reserve Bank of Boston called the region's economy "strong." It's worth noting that Fed Chairman Alan Greenspan opposes a release from the reserve.

Surprisingly, too, a modest-size release of crude--even 1 million barrels a day--might not greatly reduce the prices that U.S. consumers pay. First, the release wouldn't benefit only the U.S. It would lower prices for customers around the globe by reducing U.S. demand for imported oil. What's more, costly crude is only one factor in high gasoline and heating oil prices. James A. Osten, chief energy economist for Standard & Poor's DRI, a sister company of BUSINESS WEEK, points out that after three production boosts by OPEC, world stores of crude are growing. The main bottleneck is at the refineries, which are running flat out in an effort to produce gasoline and home heating oil. Concludes Osten: "If there isn't enough refining capacity, releasing oil from the SPR isn't going to make a huge difference."

Sure, there are victims of costly oil. But it would be cheaper to help them directly, for example by hiking funding for the Low Income Home Energy Assistance Program. And to protect consumers from wild price swings, heating-oil dealers should offer fixed-price contracts--and hedge their bets in the futures markets.

Tapping the government's reserves is a bad idea from a long-term perspective as well. The private sector, seeing that the government will bail it out, would likely reduce its own cushion of inventories. According to the Energy Dept., the private sector reduced its crude stocks by 21% from 1980 to 1999, the period when the government's reserve was getting filled up. While that reflects greater efficiency, American Petroleum Institute Research Manager Edward Porter also sees it as a measure of the oil companies' confidence that they can draw on government supplies in an emergency. If Presidents start to release oil more readily, oil companies might react by reducing their private inventories even further--negating the government's efforts.

So what's the bottom line if the reserves are opened up? More government involvement in oil, but hardly the national security that the reserves are supposed to ensure.

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