A Brief History of the United States and Oil: Strategic Petroleum Reserves (part two).
Part One – Strategic Petroleum Reserves History
The Strategic Petroleum Reserves (Shortcomings)
So now that I’ve explained a rough history of the SPR . . . I’d like to share a few thoughts as to why I think it is an outdated system that has a reverse effect on the cost of oil worldwide.
1.) The locations will only be usable until 2025. At which point the facilities will be “run down” and unable to maintain themselves.
2.) The physical constraints of the pipelines that lead to New York City on the east and Salt Lake City on the east are only able to move 4.4 million barrels of oil a day (which is only .06% of the total reserves a day). Physically . . . this small percentage of oil hitting the market would do very little to effect the price at the pump. Plus it would take it approximately 13 days after a Presidential order before this oil hit the pump.
3.) The SPR has only been used twice in 30+ years (in 1991 & 2005). Both times the amount released was so small that even those who work at the SPR and at the Department of Energy are curious as to how well the procedures and pipeline would work in a situation that required more than a few days worth of oil to be released.
4.) At times, the SPR “loans out” gas to oil corporations who are having difficulty meeting quotas. When they do this they do so with insanely high interest rates.
5.) In “crisis situations” the United States usually does the opposite of what it should do. Instead of releasing the oil . . . they typically take more oil off the market and put it in the reserves. The thinking being . . . that if things are going to get worse . . . we should at least have more oil in reserve. This does two things. A) It drives up the price of the oil because the supply has been decreased by the taking of oil off the market to put in holes. B) This immediately creates a culture of fear. The government panics and takes oil off the market preparing for the worst. Within 24 hours other countries such as China, Russia, and Saudia Arabia begin doing the same thing assuming the United States knows something that they don’t know. Thus creating a panic in the market driving the cost of the oil up even more.
6.) Again, the SPR was intended to be used as a source to create an influx of oil in a time of crisis. This would effectively drive prices down. But instead, in times of crises the SPR rarely releases oil (just twice in 30+ years) and instead buys it up. Thus, taking more oil off the market and driving oil prices even higher when it initially happens because supply has been decreased. And 24 hours later, creates a panic mode when other countries follow suit. Driving the cost higher again.
All of this has led many economists and oil consultants and strategists to speculate that in times of crises the SPR alone is responsible for driving the cost of oil up well over $8 a barrel. Which at current prices is about 15% of the cost.
I’ve also tried to be as impartial as I can (which as most of you know is pretty hard for me since I get so passionate). However, I also have some personal issues with the intent. Namely, that it is supposed to give the country a 2 month window to “resolve the situation”. Unfortunately, I’m afraid that the only way our government would see to “resolve the situation” would be through the means of military force. This bothers me that military force is considered an option when our “quality of life” (the price at the pump goes up $1) gets threatened. For example, there have been military plans drawn up for an invasion of Venezuela should Hugo Chavez ever decide to get crazy. While this is not widely known . . . it is a contingency plan that the Pentagon has drawn up in case it happens. The fact that it is so readily available at our government’s fingertips should they choose . . . is unsettling to me.
But that’s about all I got. Tried not to make it too political (except for the last paragraph) and tried to be honest and factual.
Considering it a history lesson. A behind the scenes on the relationship between our country and our love of oil.
Class will resume next week.
[tags] OPEC, Strategic Petroleum Reserves, Oil+US, Crude Oil, Arab Oil Embargo, SPR, Gas Prices, Venezuela, Hugo Chavez[/tags]
Derek
Wednesday, 18. April 2007 um 11:16 am Uhr
Is it really a price control mechanism or a worst-case scenario fallback position? It seems to me that the reserves should be held primarily to fuel defense if there is a major world war, in which the majority of oil-rich countries are on the opposing side (or refuse to sell to either side out of a desire to remain neutral).
In any case, buying more when the price goes up is truly counter-intuitive. The reserves should be filled when the prices are low (thought that would also keep them from falling as low as they could), and minor amounts released when the prices are high (which would help them from rising as much as they would otherwise). But both processes should be slow to avoid impacting the market too much.
But come on, we’re talking about politicians. The same politicians who either believe that the solution to the deficit is to 1) cut taxes and increase spending or 2) raise taxes and increase spending, when the real solution is to 3) cut taxes and decrease spending.
It’s almost always about looking like you’re doing something important than it is about actually doing something that helps and makes sense.
Eric
Wednesday, 18. April 2007 um 11:37 am Uhr
I’m not sure why you’re surprised/unsettled that type of contingency plan is drawn up (for Venezuela). There are people in every segment of the workforce that spend entire years preparing plans for things that will never happen. Take a look at some global corps plans should the Bird Flu ever become a pandemic – no fun there.
I mean I understand your issue is the use of military force… but they are damned if they do plan for it, damned if they don’t.
if they do plan, and nothing happens: the government is war-mongers, waiting with baited breath to invade.
if they don’t plan, and the order comes down to invade: they’re fools, and should have prepared better.
As for being on topic, regarding the:
“Unfortunately, I’m afraid that the only way our government would see to ‘resolve the situation’ would be through the means of military force. This bothers me that military force is considered an option when our ‘quality of life’ (the price at the pump goes up $1) gets threatened.”
Perhaps I’m cynical. This isn’t exactly some new way of doing things: resources are very commonly the “best” reason for kickin’ some foreigner ass. We did it for land for Native Americans. The Jews kicked some ass to get their land flowing with milk and honey. Britain did it for tea – Britain thought buying tea for silver was abit too expensive, so they substituted opium as their side of the trade! Chinese didn’t like this (what, with your population addicted to a drug, who can blame them), so Britain kicked their ass in a war, took over Hong Kong, and setup unfair trade terms – for tea. At least oil is abit more valuable than that (not justifying, just sayin’), despite my love for good tea.
My point is this – the problem isn’t the U.S. Government (at least, specifically). It’s just how people with power roll.