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Bursting the Oil Bubble

Sell Oil from the Strategic Petroleum Reserve to Lower Prices

SOURCE: Energy Department

Crude oil pipes at the Bryan Mound site near Freeport, Texas, where some of the Strategic Petroleum Reserve is stored.

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Like an endless rising tide, oil prices continue to climb. Beginning on January 2, when oil sold for $100 per barrel for the first time, price records have been shattered on almost a weekly basis. Some analysts predict that oil will sell for $150 per barrel by July 4. Others foresee oil reaching $200 per barrel before 2009.

There are very few immediate actions that government can take to stop the oil price escalator. But selling a relatively modest amount of crude oil from the U.S. Strategic Petroleum Reserve and promoting oil efficiency could pop the speculative oil price bubble and lower prices.

There is a combination of factors driving record oil prices. Production capacity in some oil producing nations such as Mexico and Russia is stagnant. Other producers, such as Saudi Arabia, won’t produce more oil because they make huge amounts of money now and suspect oil prices will be even higher in the future. President Bush and Vice President Cheney both traveled to Saudi Arabia this year to beg the sheiks to increase their oil production to ease the supply crunch and reduce prices. As with many other of their endeavors, Bush and Cheney failed. Growing demand from China and India is also contributing to high prices, but the United States still consumes twice as much oil as the two countries combined.

Many analysts believe that the weakened dollar helped drive up the price of oil. Petroleum is sold internationally in dollars, and a weak dollar drives investors and speculators toward the purchase of commodities such as oil that will retain their value in the face of a declining dollar. Oil bought on January 2, 2008 at $100 per barrel, for example, sells today for $132—nearly a one-third return rate in six months. Speculators can plunk down only 5 percent to 7 percent of the purchase price for oil futures, enabling them to dramatically increasing the size of their purchase.

The Senate Permanent Subcommittee on Investigations determined that “the influx of speculative money has tacked on anywhere from about $7 to about $30 per barrel to the price of crude oil.” Earlier this year, Guy Caruso, head of the U.S. Energy Information Agency, said that speculation “may have added as much as 10 percent to crude oil costs.” Caruso noted that supply and demand would indicate a price of “$90 per barrel.” Unfortunately, the Senate failed to end debate on the Consumer-First Energy Act, S. 3044, which would have reined in speculators.

We can easily increase supply temporarily, ease costs, and disrupt speculators’ expectation that oil prices are a safe bet for high returns. The United States sits on 705 million barrels of oil in the Strategic Petroleum Reserve. Since it is 97 percent full, we could easily sell a half million barrels of oil per day for 100 days without really increasing our exposure to a catastrophic oil disruption. The SPR would still be at 90 percent capacity, and we would still have nearly two months of oil on hand should all imports stop. (This is an unlikely scenario since one-third of all U.S. imports come from Canada and Mexico).

Increasing the oil supply would alter the current psychology that oil prices will continue to rise due to growing demand and fixed supply. Investors and speculators in oil contracts would see that betting on higher prices is no longer a sure thing and it could scare the quick-buck speculators out of the market.

This SPR oil sale would also generate significant funds for the federal government. The SPR oil was bought at an average price of about $28 per barrel. It could sell for the market price, which could be anything from $100 to $130 per barrel. If the average sale price is $115 per barrel, the SPR oil would generate nearly $58 million per day. These funds could provide a rebate to low-income households, finance clean energy technologies, or expand mass transit systems, which have begun to strain under record ridership.

The SPR was created in 1975 in the wake of the Arab oil embargo of 1973-74. It was designed to provide oil in case of a catastrophic supply disruption. Since its creation, there have been two emergency sales of crude oil from the SPR. After Hurricane Katrina disrupted oil flow from the Gulf of Mexico in 2005, 11 million barrels of oil were sold. In the wake of the Persian Gulf War 21 million barrels were sold in 1990-91. In 1996-97, 28 million barrels were sold for nonemergency reasons. In other words, 60 million barrels were sold over the years when the SPR contained much less oil than it does today. And the harm to low- and middle-income households of record gasoline and oil prices—which did not exist on any of these other occasions—mandates that this is an appropriate time to sell some amount of SPR oil.

Selling SPR oil should not be the only immediate action to provide relief for American families. A “fuel price oilbate” program could assist low- and middle-income families with high fuel and food prices by allowing them to recoup some of the money spent on the increased cost of gasoline since 2001. Closing outrageous tax loopholes for big oil and recovering lost oil and gas royalties from the Gulf of Mexico could pay for the program.

Since President Bush took office, the oil industry has guided his energy policies. So it’s no surprise that he has not urged Americans to increase their efficiency or done anything else to help lower gasoline prices. He should use his bully pulpit, as well as launch a national oil efficiency education campaign. He should urge American consumers and businesses to take a variety of steps to reduce gasoline use, save money, and lower prices, including:

These simple measures could provide savings comparable to the oil released from the SPR—if President Bush and the rest of his administration worked with governors and mayors to encourage Americans to embrace them. But that might cut into big oil company profits, so it’s unlikely that he would adopt such a win-win approach in his last few months in office.

Selling oil from the SPR, the fuel price oilbate program, and an efficiency push, could reduce prices and assist households most affected by high prices. A proposed “gas tax holiday” will not accomplish either goal. It would take money from the highway trust fund that is a crucial job-creating stimulus, and which our decaying transportation infrastructure requires. If not, then it would add $11 billion to our $317 billion deficit for the first eight months of FY 2008.

Oil companies don’t even have to lower prices to reflect lifting the 18.4 cents per gallon tax. Indeed, as N. Gregory Mankiw, the former chair of President Bush’s Council of Economic Advisors, says, “What you learn in Economics 101 is that if producers can’t produce much more, when you cut the tax on that good, the tax is kept … by the suppliers and is not passed on to consumers.” So the gas tax holiday” would bring the most joy to the big oil companies that already have record profits.

Conservatives blame high gasoline prices on the protection of unique places from dirty oil drilling. This is a false claim. The House Committee on Natural Resources investigated this charge and found that, “Between 1999 and 2007, the number of drilling permits issued for development of public lands increased by more than 361 percent, yet gasoline prices have also risen dramatically contradicting the argument that more drilling means lower gasoline prices. There is simply no correlation between the two.”

Conservatives nonetheless want to use record gasoline prices as an excuse to drill for oil in the Arctic National Wildlife Refuge and off of the Atlantic and Pacific coasts. These would do nothing to reduce high gasoline prices. A new analysis by the Bush administration’s own Department of Energy projects that drilling in the Arctic would cut gasoline prices a mere 2 cents, and not until 2025.

Oil companies have developed only one-quarter of the offshore leases they already hold in the western Gulf of Mexico. They must develop these leases before drilling off of Malibu or in the Chesapeake Bay. The House Committee determined that, “Development of and production from the 68 million acres currently under lease but not in production would cut U.S. imports of oil by one third.”

In response to these undeveloped leases, House leaders introduced the Responsible Federal Oil and Gas Lease Act of 2008, H.R. 6251. It would require big oil companies to either develop oil from their leases on federal public lands and waters, or give them up. Its sponsors are Representatives Nick Rahall (D-WV), Rahm Emanuel (D-IL), Maurice Hinchey (D-NY), Ed Markey (D-MA), and John Yarmuth (D-KY).

Two conservative oilmen, President George W. Bush and Vice President Dick Cheney, took office in 2001 determined to let big oil and energy companies set energy policy. Since then the price of gasoline has nearly tripled.

We need a complete change of policies to avoid far higher gasoline prices in the next decade. These changes should include funds for research, development, and commercialization of super fuel-efficient vehicles and clean alternative fuels. This strategy would still take many years to slash oil use and costs, reduce greenhouse gases, and enhance energy security. In the meantime, President Bush and Congress should immediately undertake the options proposed here to ease pain at the pump and assist those families most in need.

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