Better to Have and Not Need...

Filling the Strategic Petroleum Reserve is a good idea.

As gas prices break records daily and American drivers scream in pain at the pump, Congress is putting on its customary act of appearing to Do Something.  This week's Something also provides the benefit of letting the Democratic Congress try to put a finger in the eye of their favorite bogeyman, President George W. Bush.  Accordingly, they have passed a law telling Bush to stop buying oil for the Strategic Petroleum Reserve, ignoring his protests.

For once, congressional action makes a certain economic sense.  The bureaucrats who buy oil for the SPR buy on the open market, just like any other oil buyer.  If the government stops buying, obviously that's one less customer and consumption will go down; the famous laws of supply and demand therefore dictate that the price will go down too.

This is not to say that it's going to make much difference, as the article points out:

The action was expected to have a modest effect on pump prices, saving motorists an estimated 2 to 5 cents a gallon, backers said.

Well, every little bit helps, one might suppose.  The reason the savings are so small is because, as petroleum-buyers go, the SPR is a tiddler: Bush has been buying 70,000 barrels every day, just one-tenth of one percent of global demand.  Putting a stop to these purchases is a symbolic measure at best; even if the promised maximum price reduction of a nickel does appear, will anyone even notice?

What would get noticed is the price we may wind up paying for this politically expedient but irresponsibly shortsighted action.  The Strategic Petroleum Reserve, as its name implies, is supposed to be our national emergency reserve supply in case something goes seriously wrong.  At the moment, it contains enough to run our entire country for two months - which sounds like an awful lot of oil, but not at all like a very long time.

There is ample reason to fear a supply disruption.  We are on rather bad terms with several major oil-producing nations, notably Hugo Chavez's Venezuela and Ahmadinejad's Iran.  Since oil is a global commodity, it doesn't so much matter whether we buy the oil from these nogoodniks as long as somebody does; but in the event of a military conflict with Iran, odds are they would be in no position to continue shipping oil to anyone.  What's more, even countries we aren't likely to bomb are not averse to throwing their weight around in the energy market by strategically suspending shipments, as Russia has done in Europe.

Then, there's the ever-present possibility of terrorism.  Oil pipelines are notoriously fragile and vulnerable to attack, and they are damaged routinely in Nigeria and other African countries.  The Saudis have foiled numerous bombings at the world's biggest oil facility, Abqaiq.  Most Saudi oil is exported from this one facility; and Saudi Arabia produces one sixth of the world's petroleum.

It's utterly irresponsible for our leaders to blithely assume that the Saudi security forces are omnicompetent and that al Qaeda will ever remain buffoons; sooner or later one attacker is going to slip through.  What would happen if - well, when really - one sixth of the world's oil production goes offline for emergency repairs?

That is the purpose of the Strategic Petroleum Reserve.  An impact of that magnitude would send global oil prices off into the realm of fantasy.  Can we even imagine what would happen to our economy if fuel-pump prices were, not $5 a gallon, but $20?

With two months' supply on hand in the SPR, at least America would have the option of slapping an immediate embargo on oil exports and releasing the contents of the Reserve onto the domestic market just to keep the lights on.  This sort of emergency relief is the kind of strategic tool that a wise country keeps on hand.

Any financial adviser will tell you to keep two months' salary in the bank in case of an unforeseen disaster.  Oil is the lifeblood of our whole country's economy; should we do any less?

But the Democratic Congress has chosen to make a symbolic political gesture that will have an infinitesimal effect on gas prices and which carries a potentially astronomical cost to our society.  How utterly typical.  Being a liberal means never saying you're sorry - and shame on the Republicans who are going along with this.

Petrarch is a contributing editor for Scragged.  Read other articles by Petrarch or other articles on Economics.
Reader Comments
Democrats WANT the US supply chain to fall flat on its face. Long lines at the pump means more publicity for their anti-oil, anti-consumption tirades. There is nothing the treehuggers want more than the capitalist machine seizing up.
May 15, 2008 7:30 AM
This would be a good time to renew the debate about drilling in ANWR. And I'll offer this diagram: It shows just exactly how much impact the drilling will have:
May 16, 2008 3:06 PM
No, we should NOT drill in ANWR, not yet. There will come a time when the Arabs have nothing left but sand. Then we take back all their money with a stroke of the pen as Pres. Reagan did to the Japanese some years ago.

THAT is the time to open the ANWR, when nobody but us has any oil left and we can get top dollar for ours.
May 16, 2008 3:13 PM
Given the length of time it will take to make the drilling pay off, that seems to be a rather bad idea.

Plus, it continues our dependence on foreign oil. LET the rest of the world buy from OPEC. We'll get our own. How much of their market will that destroy?
May 16, 2008 3:20 PM
We don't really have THAT much oil in ANWR. I don't like the high gas prices, and using environmental excuses to keep us from drilling is ridiculous, but Thomas Moore has a point. What do we give the Arabs in exchange for their oil? Pieces of paper. What can they use them for? Only two things: to buy American goods (creating American jobs), or to buy American capital assets (which can't leave the country, and can be reclaimed if need be). And if absolutely necessary, it would be perfectly possible in theory to "vanish" our debts to them at the stroke of a pen.

I'm not saying this would be a good idea. But having it as an option has some merit. I think we'd do better to put all we can into serious alternative energy: namely, nuclear power for now, and space-based power systems for the longer term.
May 17, 2008 5:51 AM
Part of that argument is wrong. Assuming we give the Arabs US dollars when we buy oil - and we do - they can certainly use US dollars to shop in other places in the world. It IS true that will STILL help stabilize/bolster the value of the US dollar as is the case with any currencies that become dominant (or even ) market currencies OUTSIDE of its primary market, but the entire point of "vanishing debt with a pen" is wrong. That would only be the case if we were trading with US capital assets to begin with.
May 17, 2008 6:51 AM
Yes, the Saudis can spend their American dollars buying something from some other country, as long as THEY accept the dollar. But sooner or later, in order for it to be worth anything, that dollar has to come back to the U.S. in purchase of an American-produced good or service.
Insofar as the Arabs have already spent their dollars on purchases from third countries, or stashed them somewhere in actual cash, then you're right, we can't disappear them with a pen-stroke. But the dollars that are held in a) US treasury bonds, or b) US assets like buildings, company stock, or financial holdings, then yes we perfectly well can vanish them. We've done it before to other countries, e.g. Iran and Libya, "freezing" their assets and using them to pay off lawsuits against the countries, or in the case of debts, simply disappearing them. Now, it is an exceptionally bad idea to try this without having a really, really good reason (like state support for terrorism), but it's perfectly doable.
May 18, 2008 8:35 PM
No, that's silly. Look, I can go to any country in the world and hand a person a suitcase full of USD cash. That person will then, most likely, go to a bank in the nearest big city and change the USD currency for their own. You can do that in any bank in any city in the world. That's the whole point of international banking and trading. Currencies have set trading values against OTHER currencies. So their might be a valid argument that IF the USD currency drops more and more, the Arabs will be getting a bad ROI for their product. But there is nothing directly tying that USD cash to American wealth. Not unless it isn't really cash, and we're talking about trading capital assets.
May 19, 2008 7:02 AM
Which is exactly what we're talking about. The Arabs have hundreds of billions if not trillions of US-dollar-denominated assets. A tiny, tiny fraction of this is in actual paper cash. As you say, the cash can't be magicked away. But the capital assets and securities, which is the vast majority of their holdings, could.
May 19, 2008 7:41 AM
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