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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, 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.

Cross-posted from contraposition.org

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.

Until next time...

Originally posted to barath on Tue Jul 05, 2011 at 09:05 AM PDT.

Also republished by Community Spotlight.

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Comment Preferences

  •  Interesting diary (5+ / 0-)
    Recommended by:
    barath, vcmvo2, PapaChach, Matt Z, Blueslide

    Lots of stuff to think about, and energy is far and away the most important issue we face, whether you're talking about today or twenty years from today.

  •  Why not sell all our reserves (0+ / 0-)

    as a 100 Billion gesture towards debt reduction. Then we can float our oil drilling permits on the futures market. Anyone that wants them can pay market rates.

    -7.5 -7.28, Democratic Socialism...It's not just for Europeans.

    by Blueslide on Tue Jul 05, 2011 at 06:08:51 PM PDT

    •  That's a separate issue (0+ / 0-)

      Oil drilling permits and the SPR seem like separate issues to me.  There's plenty of evidence that there isn't much oil left to drill for in the United States (in the sense that it won't provide a supply that's going to put even a slight dent in global oil depletion picture,).

      My hope with the SPR is to help ease the transition to alternatives (even though as I discussed in previous posts, it's unlikely we'll have a seamless transition to alternatives regardless).

      contraposition.org - thoughts on energy, the environment, and society.

      by barath on Tue Jul 05, 2011 at 06:17:54 PM PDT

      [ Parent ]

      •  Having worked in the PV industry (0+ / 0-)

        for the last 3 years, I think trying to maintain momentum for alternatives depends on the number of Republicans in office. Most of the blue states have at least had a good run on alternatives and are only stopped by GOP operatives. This will never change in the near future far as I can tell.

        Selling off oil reserves makes great sense as a pawn in the current budget debates. The GOP wants to sell off government assets so lets sell this one. You have already pointed out how the concept behind it is obsolete.

        I agree with your assessment on the validity of oil permits and their ability to make a dent in our oil demand. But I constantly hear from the right how these "untapped reserves" need to be released. How can the Republicans possibly argue with us selling these off at market prices, versus our current policy of giving them away?

        I am totally on board with renewables. Let's frame it in a way that creates the greatest advantage to our side. Trying to finesse the release of oil reserves may very well have merit and I am just proposing another possible avenue which would create a serious short term dent in oil profits and absorb the current slack demand on PV and other green energy resources. We are likely to see a great deal more green energy job attrition unless manufacturers get a real boost.

        -7.5 -7.28, Democratic Socialism...It's not just for Europeans.

        by Blueslide on Tue Jul 05, 2011 at 07:27:18 PM PDT

        [ Parent ]

        •  Hmm... (0+ / 0-)
          You have already pointed out how the concept behind it is obsolete.

          I guess in one sense it's obsolete - that we're near the declining slope of oil production - but in another sense this is exactly when it might come in handy to mitigate the unnecessary downsides of peak oil (as I discuss above).

          I think trying to maintain momentum for alternatives depends on the number of Republicans in office.

          This is only if alternatives depend upon government action, which they do now, but may not in the future if their price comes down relative to fossil fuels.  But the issue is that if fossil fuels have volatile prices then it'll be hard to fund alternative projects because it'll be unclear whether they'll be profitable or not.

          contraposition.org - thoughts on energy, the environment, and society.

          by barath on Tue Jul 05, 2011 at 08:12:53 PM PDT

          [ Parent ]

          •  PV is close to as low as possible (0+ / 0-)

            We are starting to see the Chinese affect. Non Chinese mfr's can no longer compete because of dropping prices and will start to be weeded out. Prices on PV are nearing bottom. Even if the cost of modules drops another 33%, it won't impact net cost of residential installs that much.

            Net metering will always be required for wind and PV and that is a government regulation. If we stop funding fossil fuels they could likely compete on their own but government intervention is king (at the risk of sounding libertarian).

            -7.5 -7.28, Democratic Socialism...It's not just for Europeans.

            by Blueslide on Wed Jul 06, 2011 at 01:29:55 PM PDT

            [ Parent ]

  •  Your graph has a very optimistic population (0+ / 0-)

    projection.

  •  I agree (1+ / 0-)
    Recommended by:
    barath

    we need to smooth the boom bust price cycle because the long term trend is up. This price signal coming as it is now makes it easier for the consumer to dismiss because when prices go up we've always seen them come back down.

    I've heard President Obama say things like oil is getting harder to find (witness deepwater drilling) at the same time that world demand keeps going up. This is the peak oil scenario, yet I don't think I've heard him say that phrase.

    I think until the official outlook of the EIA is that peak oil is happening and they stop the magical thinking that we will backfill the depletion, we won't have real energy policy coming from the government.

    "In text, use only a single word space after all sentence punctuation." - Oxford Style Manual, Oxford University Press, 2003.

    by shaggies2009 on Tue Jul 05, 2011 at 11:27:20 PM PDT

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