Monday, August 8, 2011

Tapping our oil

You and I own some oil. It's in the ground in Texas and Louisiana.

Much has been made of the recent decision to tap the Strategic Petroleum Reserve (SPR). Some are for it, and others are against it. Some are for it, others are against it. But there's something missing in this discussion - something that affects our economy, the future of alternative energy, and the autonomy of local regions.

In response to the OPEC oil embargo of 1973, the U.S. government established the SPR, now maintained by the Department of Energy. It holds about $100 billion of crude oil, ready for tapping at a moment's notice. The IEA announced recently that OECD nations have agreed to tap the U.S. and European reserves to make up for the loss of production from unrest in Libya.

In his post on the subject, climate writer Joe Romm argues that it's a good thing we're tapping the Strategic Petroleum Reserve. Romm writes:

Let's face it. The strategic reserve is not strategic. It was created at a time when people worried that countries could withhold oil from us. But now we have a global market, so that isn't possible. We have replaced oil shortages with price spikes. So if we don't use the SPRO to deal with our current price spike, when would we ever use it? After all, in the entire three-decade history of the SPRO, a mere 32 million barrels were sold during crises.

So I can't imagine we're going to keep this relatively useless "reserve" for many more decades. As you know better than anyone Mr. Chairman, we need to be almost completely off of oil by mid-century to avoid catastrophic climate impacts. So sometime soon we're going to sell off the SPRO's oil -- I can't imagine we are seriously going to keep $100 billion under the mattress forever.

I think we could use the price relief now. We could generate $20 to 25 billion this year alone. Some of that could help low-income families deal with high energy bills. And some could jump-start the transition to a clean energy economy and end our oil addiction.

Romm is partially right, but for very wrong reasons. We should tap the SPR right now to dampen price volatility, but not because the SPR is a bad long-term idea.

Tapping the SPR brings the price of oil down; refilling it brings the price oil up. Thus the SPR acts as a buffer or counterweight against price swings. When the price drops significantly at some point in the future (due, say, to the next recession), we can fill the SPR back up again. This allows us to keep the price of oil from overshooting during recoveries and undershooting during recessions.

Price volatility is a key problem in that it makes it difficult for alternative energy to get a toehold. That is, every time oil (and generally fossil fuel) prices spike, alternatives are seen as relatively cheap and investment begins; once West Texas Intermediate hits $80-90/bbl and other fossil fuels hit their equivalents, alternatives like solar and wind (and, unfortunately, tar sands) start looking cheap. A year or three later when those high oil prices help cause a new recession, oil prices fall again, and pending alternative energy projects get canceled as they appear unlikely to make a profit. This high-frequency noise makes it hard to discern the long-term price signal being sent: oil prices are rising steadily. Take a look at this price chart of WTI over the last 5 years - and note that during this time total supply has remained roughly flat (and net exports have only changed marginally):

By dampening volatility in oil markets, it's possible for the SPR to make the long term depletion of oil obvious. Careful management of the SPR to maintain a very slowly increasing price point would aid in the transition to alternatives.

Would this be a government price control? Yes, but not completely, as the OECD wouldn't be able to control oil prices perfectly. I'd argue in our current situation it's better to use the SPR as a counterweight for price swings rather than let the exaggerated boom-and-bust dynamic to play out on its own. Most states already control prices in electricity markets, so this is nothing new.

In the long run, having a second, distributed (regional / state-by-state) SPR system is a good idea. A centrally-located SPR is vulnerable to transportation and pipeline disruptions, and requires federal planning for its use. Regional SPRs that include not just crude oil but refined products would help dampen local price swings.

View the original article here

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