QandO: Playing with gasoline

March 31, 2004

Playing with gasoline
Posted by Jon Henke

Regarding John Kerry's campaign suggestion to turn the Strategic Petroleum Reserve into political pork - a shocking abdication of national security - Econopundit has salient commentary....

I guess the operative quote, from the Kerry website, is the following:
We'll stop diverting oil to the Strategic Petroleum Reserve until gas prices get back to normal.
We can only ask two questions: (1) what's "normal" for gas prices?, and (2) does this mean President Kerry would convert the SPR, designed for national security, into a petroleum price stabilization/control scheme?

I'll answer both questions:
1: "normal" depends on the political cycle. Will lower prices secure him more votes? Then prices are abnormally high!
2: Yes. The hell with national security.

In case you're not familiar with the economic reasons we shouldn't tap the SPR, Antler links this OpinionJournal piece...

And that brings us back to the U.S. Strategic Petroleum Reserve, which was created after the Arab oil embargo in the early 1970s. The idea was to stockpile oil to cope with any future emergency shortfall in supply--not to mitigate short-term price spikes. As part of the run-up to the Iraq war, the Bush Administration decided to add to the reserves--now about 650 million barrels.

But hundreds of millions of barrels of oil is a seductive target for political manipulation, as Bill Clinton proved when he released reserves to tame gasoline prices before the 1996 election. We hope President Bush resists that temptation, because in the long term such a response would be dangerous.

If every President turned to the oil reserve when prices shoot up, companies would reduce the amount of inventory they are willing to carry and exacerbate the supply problem. In the short term, there is also no economic need to draw on the reserve. The economy is humming along and panicking would only create other dislocations. The oil reserve was not designed, nor should it be used, to relieve consumers at the pump for a few weeks.

In short, the SPR is there because of the enormous economic weapon wielded by OPEC.....without the SPR, another 1970s-style embargo by OPEC could do huge damage to the entire United States economy within weeks. Damage that would compromise our national security, as well as our economy.

But, never mind that. We can lower prices by 10 cents a gallon! Maybe! Until the market adjusts to the new Santa Claus!

And then what?

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