Apparently, there is such a thing as a free lunch in Congress. It’s called the Strategic Petroleum Reserve.
The SPR, as it’s known, consists of about 700 million barrels of oil stored in four underground salt domes along the coast of the Gulf of Mexico. It was created in the wake of the Arab oil embargo in the 1973-74, and designed to serve as weapon against the kind of disruptions that resulted when OPEC started using crude as a political tool 40 years ago.
Of course, the domestic shale boom has reduced the likelihood of those disruptions. The SPR now holds 137 days worth of oil imports – significantly more than the 90 days the International Energy Agency says developed countries should have – and concerns over scarcity of crude have diminished.
So Washington has found another purpose for the SPR: Piggy bank.
In May, the House Energy and Commerce Committee approved selling oil from the reserve to raise $5.2 billion to fund the 21st Century Cures Act (developed, not incidentally, by the panel’s chairman), a measure that would streamline the Food and Drug Administration’s approval process for new drugs.
Then last week, the Senate came up with a plan to sell 101 million barrels of crude from the SPR to generate $9 billion that would help pay for a new highway bill.
I want to look at this political sleight-of-hand from two perspectives: legal and economic.
Regarding the former, the law says that a drawdown and sale of oil from the SPR cannot be made unless the president has determined that such actions “are required by a severe energy supply disruption or by obligations of the United States under the international energy program.”
It goes on to state that a “severe energy supply disruption shall be deemed to exist if the President determines that (a) an emergency situation exists and there is a significant reduction in supply which is of significant scope and duration; (b) a severe increase in the price of petroleum products has resulted from such emergency situation; and (c) such price increase is likely to cause a major adverse impact on the national economy.”
So prices are plummeting, output is growing, and the only adverse effect to the economy right now is the result of sub-$50/barrel oil. That’s not even close to fitting the statutory criteria for a drawdown and sale. And to state the obvious, neither an FDA regulation nor a highway bill strikes me as constituting a “severe energy supply disruption.” But maybe Congress has a different definition.
It’s the economic argument, though, that’s a bit laughable.
The $5.4 billion that would be generated to fund the House bill is based on a crude oil sale price of $84/barrel; the $9 billion on the Senate side assumes $89/ barrel. This past Friday, the U.S. benchmark settled down 31 cents, to $48.14 per barrel, the lowest settlement since March. Prices fell 6 percent last week alone.
Which leaves me wondering where Congress, in its infinite wisdom, plans on finding the extra $40 per barrel that right now just isn’t there – and isn't going to get back there in the foreseeable future. Am I the only who is concerned that the people we depend upon to make budgets, pay the nation’s bills, and fund government programs can’t do simple math when it comes to crude prices?
I’m not strictly opposed to a drawdown and sale, and I certainly don’t think the SPR is sacred. But a little logic ought to prevail here.
The Department of Energy has estimated it would take between $1.5 billion and $2 billion to maintain and modernize the reserve and ensure it has the pipeline capacity and capability to get emergency oil where it needs to be. If we’re going to sell the crude, that’s where the money ought to go. And a $48/barrel environment probably isn't the best climate to sell it.
Of course, those arguments are likely to fall on deaf ears in Washington. Because Washington seems to be the only place in the world where a vital strategic energy resource can be mistaken for an ATM.