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The Strategic Petroleum Reserve Isn't A National Piggy Bank

I have covered the reasons for my opposition many times, but the single biggest reason I oppose these sorts of releases is that the fundamental reason for the existence of the Strategic Petroleum Reserve (SPR) is to provide insurance in case of a supply emergency. Politicians who use the reserve in an attempt to influence gas prices so they can enhance their chances of reelection should be thrown in jail if a national emergency does occur and we find ourselves with a depleted reserve.

I have also pointed out the irony that politicians who are deeply concerned about climate change are leading the charge to release oil from the SPR — because they want lower gas prices. It is as if they do not understand that when gasoline is cheap, people burn more of it and there are more carbon dioxide emissions. The only context in which their positions make some sort of twisted sense, is if they believe that by depleting the petroleum reserve prices will actually become much more volatile and spike much higher, thus hastening our move away from oil.

Of course if they believe that, they couldn’t come out and admit it because most people would conclude that they were insane. It would be like a person going without fire insurance and hoping their house burns down so they can move into a “better” house. But then when the house burns, the person realizes they are broke and can’t afford a better house. So they go live under an overpass.

Until now, the only two contexts in which I could interpret their positions was either they are putting their reelection interests ahead of the climate change problem they profess to be concerned about, or their ulterior motive is to put the U.S. at grave economic risk in an attempt to address the climate change issue by removing our catastrophic insurance policy. But there is another possibility. The value of the SPR has increased as oil prices have increased, and they view the SPR as a fat source of revenue. The following story recently came to my attention via Consumer Energy Report’s Energy Ticker:

McClintock says required sale of SPR oil in energy bill a ’scandal’

Rep. Tom McClintock (R-Calif.) on Thursday said he opposes language in the 2012 Energy and Water Appropriations Act that requires the sale of $500 million worth of oil in the U.S. Strategic Petroleum Reserve to help fund other government spending.

“There’s a half a billion dollars going out of the Strategic Petroleum Reserve, not to replenish the reserve but to fund additional spending in this budget,” he said. “That is a scandal. It’s time we put a stop to it.”

McClintock said under current law, any money earned on the sale of SPR oil must be returned for the purpose of replenishing the reserve.

Under the bill under consideration this week, H.R. 2354, the secretary of Energy would be required to sell $500 million worth of SPR oil by March 1, 2012. The bill says the secretary “shall deposit any proceeds from such sales in the General Fund of the Treasury.”

Report language accompanying the bill from the Appropriations Committee acknowledges that money raised from the sale would be used to “offset spending elsewhere in the Department of Energy’s budget request.” The report also says this change should not be seen as a precedent.

Has our government completely lost their mind here? Using the SPR to fund other programs? Again, I suppose there is some twisted logic in there: If we use money from the SPR to fund programs designed to reduce oil consumption, perhaps that is a good investment. Perhaps, unless those programs don’t work very well, we find ourselves still heavily dependent upon oil, and major unrest in the Middle East suddenly takes 10 or 15 million barrels of oil per day off the market.

But count me among those who would prefer to see fiscal constraint rather than see us start viewing the SPR as a national piggy bank for the politicians. History has shown that our politicians aren’t very good at saving money, but they do know how to spend it. So it would be in our best interest to have them keep their hands off the SPR and find the funding for their programs — if they are truly worth funding — elsewhere.

Robert Rapier's picture

Thank Robert for the Post!

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Geoffrey Styles's picture
Geoffrey Styles on July 21, 2011

Robert,

Inconsistent government accounting is another culprit, here.  The recent sale of SPR oil only looks profitable if one ignores the requirement to replace that quantity later.  One way to rectify that would be to require the Department of Energy to use the same kind of mark-to-market accounting as publicly-traded companies trading energy commodities.  At the moment, the the mark-to-market would show roughly a breakeven, because the oil was sold on a market-index basis that won’t “price out” until delivery is made.  However, from that point until the oil is replaced in the caverns, DOE’s “position” will be exposed to the same kind of market risks that have sent oil back up by about $8/bbl since the sale was announced last month.  Let’s see what the P&L looks like when the other half of the deal, replacing the inventory, is completed.  

Robert Rapier's picture
Robert Rapier on July 21, 2011

The recent sale of SPR oil only looks profitable if one ignores the requirement to replace that quantity later.


Geoff, I believe they intend to ignore that requirement. After all, this appears to be a requirement to sell oil from there with the only defined need being the funding of other projects. That doesn’t sound like there is any intent to replace it, unless it is one of those deals where they spend now and force a future administration to replace it.

RR

Rick Engebretson's picture
Rick Engebretson on July 22, 2011

One possibility is suggested by a story in today’s Mpls. StarTribune. Apparently there is a rush to blend as much ethanol as possible before the subsidy is cut. A profit margin might be created purely from the tax subsidy.

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