By Nicolas Loris and Richard Sigman ~
As the new administration seeks to reduce the regulatory burden on the energy market, one critical change is to liquidate the Strategic Petroleum Reserve.
The government-controlled stockpile of crude oil is a waste of taxpayer money and ignores how the private sector more effectively responds to price changes.
President Gerald Ford and Congress created the Strategic Petroleum Reserve after the Arab oil embargo and the creation of the Organization of the Petroleum Exporting Countries in the 1970s. The U.S. joined the International Energy Agency in November 1974 to coordinate a multilateral response to oil supply shocks and established the Strategic Petroleum Reserve through legislation the following year.
Recently, the Department of Energy issued an announcement that about 10 million barrels of the current inventory would be sold in February, but this approach will continue to cost the American taxpayer. Instead, the Strategic Petroleum Reserve should be sold off entirely.
Congress and the Trump administration should end the market-altering effects of a government inventory. In fact, government-controlled inventories cripple the market’s efficacy because often politicians will waver on whether or not to release the reserves, creating uncertainty for businesses.
The “benefits” associated with the government’s use of the Strategic Petroleum Reserve in alleged emergencies are dubious and difficult to accurately assess because of the difficulty in isolating the effect on the market of the oil release, given all the other variables that affect the global oil market.
Supply shocks are not reason enough for government stockpiling and, most important, can be addressed through market forces with an abundance of private inventories.
From May 2014 to February 2016, private stocks of crude oil increased from 366 to 508 million barrels according to the Energy Information Administration. The private sector is fully capable of creating efficient markets for crude oil that get oil shipments to where they are the most valuable.
The argument for the Strategic Petroleum Reserve in regard to national security falls apart with even modest scrutiny. It is important to note that the original purpose of the reserve was never to create an emergency Department of Defense stockpile in the first place.
Nevertheless, the military already has channels in place of acquiring fuel. There are many ways to stockpile fuel for military purposes without creating a storage system designed for the market of general consumption.
Completely drawing down an inventory of 695 million barrels of crude oil worth $53 per barrel should generate approximately 35 billion dollars. Congress should explicitly stipulate that all revenues collected from Strategic Petroleum Reserve sales go exclusively toward deficit reduction rather than as means to pay for other projects.
Congress has proposed modest Strategic Petroleum Reserve sales to pay for other government spending provisions, such as funding for the Highway Trust Fund. Recognizing that the Department of Energy should eliminate the reserve is not an invitation to find new ways to spend the revenue.
The Strategic Petroleum Reserve has been a terrible investment, and the American taxpayer has shouldered the burden. While a direct sale will never pay for all the sunk costs of the reserve, a total spin-off will result in the best solution going forward.