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With light sweet crude closing at $125.80 on Tuesday â€“ just a half a buck off its all-time high set the previous day, Washington D.C. is full of calls to do something about the skyrocketing cost of energy, or at least appear to be doing something.
Hillary Clinton and John McCain have proposed suspending the gas tax over the peak summer driving season (a concept we never really understood, since it seems like people drive plenty in the winter, too, and need oil to heat their houses).
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Another interesting proposal is a bit further along. The Senate today passed, by an astounding 97-1 margin, a bill to direct the Bush administration to stop filling the Strategic Petroleum Reserve until oil prices drop below $75 a barrel. And both the genesis of the idea and its lonely opposition outside the White House hail from Colorado.
The plan originated with Aspen-based oil consultant Philip K. Verleger, who was director of the Office of Domestic Energy Policy under President Carter. The lone Senator to vote against the plan? None other than Wayne Allard.
Some backstory: The Strategic Petroleum Reserve is an artifact of the Arab oil embargo of 1973-74, which helped to usher in that era’s stagflation — a sputtering economy hamstrung by persistent inflation. Congress created it to insulate the country from the effects of future oil supply disruptions. “It’s like the fire extinguisher in case of emergency,” said White House press secretary Dana Perino, defending the administration’s plan to fill the SPR to brimming.
It has a capacity of 727 million barrels of oil, but until President Bush, in a 2001 directive, ordered it filled, it had never held more than 592 million barrels. And, despite Perino’s metaphor, the Reserve has been accessed several times, including a non-emergency sale in 1996 (curiously, an election year), under President Clinton, to stimulate the economy. There’s even an obscure provision in a 1975 treaty with Israel that requires the U.S. to sell oil to Israel for five years in emergency situations.
And, 700 million barrels sounds like a lot, but the U.S. currently uses about 21 million barrels of oil a day, 12 million of which is imported. So, even at capacity, a fully stocked reserve could offset about two months’ of disruption to imported supplies.
Stranger yet, according to its web site, the Reserve currently sits at 702 million barrels, meaning that the Senate vote will divert a maximum of 25 million barrels â€“ a little over a day’s supply.
Stranger even than that, the Bush administration has been stockpiling oil in the Reserve at the rate of about 70,000 barrels a day, or .3 percent of national demand. So with crude at $125.80 a barrel, releasing that oil into the market would decrease oil prices by a whopping $0.38 a barrel.
So why the patriotic rush to stop hoarding oil? Verleger testified to Congress in December that the runup in oil prices was partly due to the decision to keep stockpiling oil, particularly sweet crude. Based on a detailed analysis, Verleger suggests that if we stopped adding to the Reserve, oil might fall back as far as $60 a barrel (it went past $100/bbl not long after his appearance); he also says that the SPR could sell some light sweet crude and replace it with cheaper, lower-grade sour crude, which is higher in sulfur (the Reserve has both types of oil).
In a statement, Allard said that the Senate vote was “a missed opportunity to lower gas prices for American consumers,” referring to a failed vote on a separate bill to increase domestic energy production of oil, natural gas and oil shale. That doesn’t directly address why he voted no on the Verleger plan, but hey, who needs coherency in our elected representatives?
Anyway, who’s right? Will the plan push the price of crude back down like Verleger claims? Or, like the gas tax suspension that Verleger and 300+ other economists oppose, will the discount just get soaked up by ever-growing demand? With today’s volatile energy prices, it might be tough to tell even if the plan does come to pass. But that will be a while, anyway. The bill has passed both the Senate and House by easily veto-proof margins, but the two versions must be reconciled before they can be sent on to the President, who then has to veto it before it comes up for a second vote to override the veto.
Of course, by that point, the reserve will be that much closer to full, and this fall’s pivotal elections will be upon us. Which, of course, might be the reason that the plan is so popular to begin with. As for Allard, he doesn’t much care about that; he’s just one of five active senators (all Republican) not seeking re-election this fall.