Yesterday, Senator Obama announced (in a startling change of position) that the US should tap the Strategic Petroleum Reserve to counteract high gasoline prices. Unfortunately Obama’s new solution is counterproductive—perhaps even naive—for a couple of reasons.
The SPR, created in the wake of the 1973 oil embargo, is intended to counter short-term disruptions to the supply of oil, not long-term disruptions to market price. When the Middle East essentially shut off the flow of oil in the seventies to punish us for supporting Israel, it became clear that there are strong economic and national security arguments for stockpiling oil. But a shortage is not the situation we face today. The oil is flowing, but prices are high. Demand remains high. The market is working! Drawdowns of the SPR, a stockpile of finite size, will not have a lasting effect on the market situation.
Also, the Strategic Petroleum Reserve is not a giant underground gas tank. It contains crude oil. To have a useful impact on consumers, the oil must be extracted and sold to refiners—presumably at below-market-rate prices. In the US, about 17% of gasoline prices account for refining and profit (2007 DOE figures). When oil is drawn from the reserve, what mechanisms exist to prevent refiners (who are already enjoying record-breaking revenues) from turning the cheap oil into yet more profits?
Many countries, like China, simply subsidize fuel prices to keep them attractively low to citizens. I wonder if subsidies might be cheaper, more effective, and easier to regulate than actual oil.
One might question whether we have a problem anyway. Yes, gas prices are higher than ever, and that’s an unpopular situation. We know that prices are having an impact on tourism and shipping. Heating costs threaten the poor and loom ominously over the middle class—and we need to do something about that. But in a way, it’s refreshing to see how, after enjoying decades of ridiculously low fuel prices, individuals and businesses finally have an incentive to cut back on waste and inefficiency. There are indications that centralized hub-and-spoke distribution and rail shipping are making comebacks. More people are using mass transit. Homeowners who have been accustomed to cheap heat are installing proper insulation and efficient furnaces. Driving small cars has finally become fashionable. Assuming we can address the short-term human costs, how can this stuff be bad?