Seeking Alpha
Profile| Send Message| ()  

According to an article in today's Burlington Free Press, Vermont Congressman Peter Welch (D) has joined other Congresspeople in a letter to President Obama urging him use the strategic petroleum reserve (SPR) to alleviate a runup in summer gasoline prices, which may occur due the spread of the freedom virus in oil producing places. With all due respect to the Congressman, that would be a really dumb thing to do at this time and just to keep prices down.

Our oil supply IS likely to be much less secure in the immediate future than it is today. The promise by Saudi Arabia to make up for any Libyan shortfall is more scary than reassuring. Do we really want to be more dependent on that repressive regime? Oil supplies from Iran, Iraq, and other producers could easily be disrupted in the immediate future. There may be a time when essential services can't be preserved without using the strategic petroleum reserve – or giving into blackmail from a dictator. The SPR currently holds 727 million barrels of oil – only enough to replace imports for 75 days according to the Department of Energy. We don't want the reserve to be at any less than full capacity when that moment comes.

If higher prices force us to drive less this summer, the economy will suffer; but the price signal will make us deal with shortages in a rational way. That's a better alternative than the rationing which would have to occur if the SPR is empty when the crunch comes. The economy – and the world – will suffer more in the long term if we use strategic assets to meet tactical short term goals.

Yes, there is a risk of double-dip recession if oil prices go up. Use of the SPR might postpone that risk for a few months. However, there is a risk of both wide-spread war and worldwide depression if we don't have the reserves to protect ourselves from the very real chance that there will be a significant and sudden oil supply disruption in the near term future. This is only a hard decision if you pay more attention to short term politics than long term implications.

There are some things that we can be doing, however, to deal with long term oil supply issues and current events:

  1. With or without the rest of the world, immediately impose a no fly zone in Libya to protect Libyans form desperate moves by Gaddafi to protect his power. We did this successfully in Iraq for years to protect the Kurds. Protecting the Libyans from the death throes of a dictator may make us some friends long term; more importantly, it's the right thing to do. Continued dithering in the UN is demeaning and deadly for Libyans.
  2. Restart deep water drilling. Recently a federal judge had to issue an order to the Interior Department to move forward on permits in a reasonable period of time because the Obama Administration replaced an official moratorium on permits with an unofficial one. We need to develop domestic sources of oil. We need to make clear that we are not going to allow ourselves to be increasingly dependent on supplies from places in need of regime change. It's these deep reserves with decades of oil we need to be tapping, not the few months of supply in the SPR.
  3. Establish a reasonable permitting processes so that we can drill the wells and build the pipelines we need to rapidly displace oil with our own natural gas for many applications.
  4. Ditto for building out a real national electrical grid – so we can displace oil with electrically-delivered energy.

None of the actions above will prevent gas prices from going up this summer if unrest continues in the Middle East. Rising prices will help us avoid massive disruption by discouraging consumption and encouraging fuel switching. Drawing down our strategic reserves will mask the price signal and leave us increasingly vulnerable to events half way around the world. Very bad idea.

Source: Don't Draw Down the Strategic Petroleum Reserve