Why Did Congress Pick on the National Oil Stockpile?
U.S. military planning and operations have placed heavy emphasis over the years on protecting American access to foreign oil. So there is a certain illogic to linking improved funding for the armed services in the new budget agreement with sell-offs from our Strategic Petroleum Reserve – a key weapon in avoiding excessive dependence on oil from the most dangerous region on the planet.
But circumstances have changed. U.S. net imports of oil have plummeted. The 9/11 attacks – indirectly funded by dollars from oil – have become more distant memories. So the work of the bipartisan compromise deserves a fair assessment.
The budget compromise calls for reducing the reserve, created to deal with emergency interruptions in supply, from its current 695 million barrels (137 days of import protection) to 637 million. The sales would take place gradually through 2025, with the largest withdrawals at the end of the period, giving time for seller’s remorse if circumstances change yet again.
At the current price of around $50 per barrel, the sales would net the federal government roughly $3 billion (or more in the likelihood prices rebound) – a small part of the revenues needed to make the big deal work.
More than commonly recognized, a requirement that domestic oil producers maintain surplus production capacity – a precursor of the petroleum reserve – contributed greatly to America’s status in the world from the 1930s to the 1960s. The policy had several rationales, but the surge production it made possible helped avoid global economic chaos during a world boycott of Iranian oil during the early 1950s (after the nationalization of what is now BP), the closure of the Suez Canal in 1956, and the Six Day War in 1967.
Surplus capacity disappeared about the same time as U.S. production started to fall in 1970. The country paid a heavy price after the 1973 launch of the Arab Oil Embargo, when the contingency plans that called for short-term increases in domestic production turned out to be obsolete.
Congress passed and President Ford signed in 1975 a broad energy bill that authorized the current Strategic Petroleum Reserve to fill the void. It was not until the 1980s, however, that injections were sufficient to make the reserve a real force.
Over time, the program has enjoyed bipartisan support, helped forge sometimes-useful international sharing agreements, and played a role in easing market tightness, for example, during the 1991 Gulf War and after several hurricanes damaged oil facilities in the Gulf of Mexico.
Jason Bordoff, President Obama’s former National Security Council adviser on energy and climate told the Washington Post’s Steven Mufson this week that the oil available in the reserve made it easier to impose oil sanctions on Iran to get a nuclear deal.
In the past ten years, net oil imports have fallen from 60 percent to below 30 percent – a remarkable achievement. Some experts complain that does not justify selling the oil when supplies are ample – just the opposite of what was intended. But this argument lacks punch since the sales will be spread over eight years.
The problem with the sale is what might come next. What if our national commitment to auto efficiency standards flags? It continues to be impossible to adjust gasoline taxes at least for inflation, making it cheaper per mile to drive (or build and repair roads)? We don’t have reasonable policies for domestic production? Or, the oil reserve proves such a convenient piggy bank that withdrawals continue past 2025?
In case no one has noticed, the Middle East is hardly an island of stability. Now is not the time to get complacent about oil supplies. We still need a well-functioning emergency stockpile of oil, even if we can adjust to the lower volumes mandated by the budget agreement.
The requirements in the budget deal for testing of the reserve infrastructure and a systematic review of its future role provide some confidence that the nation remains committed to the reserve. But the review needs to address a complicated but important impediment to its effective use.
When President Reagan added most of the oil to the reserve, purchases were “off budget.” With the current budget rules, in which the reserve in “on budget,” the reserve simply could not be filled – a sobering reminder of how enfeebled the federal government has become.
Absent some clever use of oil exchanges, we currently have no realistic way to pay for oil to replace that sold during an oil emergency, which greatly limits the value of our holdings.
This problem can find parallels in other parts of the federal budget. Even those who admit the rules for the oil reserve don’t make much sense worry that if the reserve is taken off budget, others will demand the same treatment.
The Treasury Department – a long-time skeptic of ever using the reserve – would probably object, but it should be possible to have a well-defined exception stating that the proceeds from the sales of oil during an emergency could be used to replenish stocks. There would be no net adverse impact on the national debt.
Such action would assuage fears that the current reduction in the size of the reserve represents a return to complacency and a serious weakening of an asset carefully assembled over the years by Republicans and Democrats.
Time will tell whether the selloff of the Strategic Petroleum Reserve will come to be seen as a necessary evil for preventing a government shutdown, made possible by our virtue in cutting oil imports, or part of a reckless endangerment that increases the risk we will need to send more troops to the Middle East.