The Exchange

Do We Still Need the Strategic Petroleum Reserve?

The Exchange

By Joel Kurtzman

Everyone knows these are lean times for the government, partly because the economy is not growing fast enough. Faster growth means more revenue from existing taxes. Because of that, every penny counts. That’s why it's time to take another look at a no-longer-needed asset the Federal government is holding in a handful of underground locations: It’s time to sell the Strategic Petroleum Reserve.

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The SPR was created in 1975, by President Gerald Ford in the aftermath of two brutal oil embargos. The embargos created havoc with the economy, and put gasoline into such short supply it had to be rationed. Even then there were long lines just to get to the pump. With the United States running out of oil, it made good sense to set aside that fuel. Today there are about 700 million barrels of oil in the Strategic Oil Reserve, worth about $70 billion.

Since 2005, everything’s changed. The United States is no longer energy scarce, it is energy abundant. Fracking for natural gas and oil has put the United States back into the big leagues of the world’s energy producers. In 2007, the US produced 1.8 million barrels of oil a day, last year the average was 2.3 million barrels of oil a day – and climbing, according to the Energy Information Agency (EIA). And, while oil production is going up, consumption is going down. In 2007, the US consumed 7.5 million barrels of oil a day, last year it consumed just 6.7 million barrels a day, according to the EIA.

On track for energy independence

Because oil production is growing so rapidly, the International Energy Agency (IEA) estimates by 2020, the US will overtake Saudi Arabia as the world’s biggest oil producing country. Further estimates by the IEA, EIA, the National Intelligence Council, Exxon (XOM), and others, say the United States could become energy independent by around 2030. It will also soon have the capacity to be an exporter of natural gas and oil. America’s good-energy fortune does not take into account that the U.S. is also the world’s largest producer of ethanol, and electricity generated by wind and solar.

If this is the case, do we still need to hoard oil?

Selling off the Strategic Petroleum Reserve will push down prices and, as every economist knows, high oil prices act like a tax on growth. According to a 2011 paper by the OECD, “The Effect of Oil Price Hikes on Economic Activity and Inflation,” each $10 increase in the price of oil robs the economy of two-tenths of a percentage point of growth and adds a commensurate amount to inflation. A decade ago, oil sold for $33 a barrel, now it’s roughly $100. Using OECD’s figures, a decade’s worth of high oil prices cost the economy roughly $1.7 trillion in lost growth, while contributing to rising prices. Had that money not gone out of the economy, today’s anemic recovery might have been much more robust.

An outdated system

In the past, the strategic petroleum reserve functioned as a shock absorber, often in advance of an anticipated event. In January 1991, just before Operation Desert Storm, President George H.W. Bush announced the sale of just 34 million barrels of oil from the reserve. The next day, oil prices fell from $32 a barrel to $21 a barrel, one of the biggest prices decreases ever. Oil prices have fallen each time reserves were sold.

But with today’s energy bonanza from previously inaccessible reserves of oil and natural gas, America’s strategic petroleum reserve is the abundance of energy reserves placed under our feet by nature. According to the Congressional Research Service, the United States has the largest reserves of fossil fuels of any country, with Russia in second place.

If the strategic petroleum reserve was put up for sale all at once it would create havoc in the world’s oil markets and in many of the world’s economies – and then it would be over. But if the contents of the Strategic Petroleum Reserve would be sold over the course of a year on random days, chances are oil prices would stay low for the duration of the sales. And why wouldn’t they? If oil traders knew that on any random day new oil could be sold into the market, they would be a lot less interested in accumulating long positions in crude. The result would be a year’s worth of low oil prices which may be sufficient to give the economy the jolt it needs to get into high gear.

Selling the Strategic Petroleum Reserve would be like giving the economy a twofer: The government would get cash from the sale of the Strategic Petroleum Reserve, and it would also increase tax revenues from higher rates of growth.

But even more importantly, as capacity increases, and America exports some of its bounties of natural gas and oil, there will be a strategic shift away from traditional energy exporters and toward the United States. Rather than being at the mercy of other people’s production decisions, America would have the energy wherewithal to ignore bullying and determine its own future.

As one of the world’s biggest energy producers, and the country with the largest reserves, the Strategic Petroleum Reserve is like wearing a belt with suspenders. We need one, but we don’t need both. Now that fracking and other new technologies have made the United States energy rich, it’s time to change our thinking. It’s time to sell the Strategic Petroleum Reserve.

Joel Kurtzman is Executive Director of the Milken Institute's Senior Fellows Program and the author (forthcoming) of “Unleashing America’s Second Century.”

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