11 July, 2008

Jonah Goldberg Doesn't Want to Tap the SPR

In a recent post on the Corner, Jonah Goldberg takes offense to Newt Gingrich's advice to dump 1/3 of the Strategic Petroleum Reserve to "punish speculators for betting against America".

As Jonah himself puts it:

I thought the SPR was "strategic" in terms of national security, not for "punishing speculators" and managing the price of commodities during an election year.

I think Jonah is right. And wrong.

It's not for punishing speculators or managing prices during an election year. But it's not necessarily only a "national security" reserve (depending upon how one defines "national security").

The SPR was created by The Energy Policy and Conservation Act (EPCA). This was signed into law by Gerald Ford (R-USA) in 1975, a direct result of the 1973-1974 Arab oil embargo.

According to Robert Bamberger, in a report he filed for Congress in 2006, the original text of the act allowed the President to tap the SPR if:

    1. an emergency situation exists and there is a significant reduction in supply which is of significant scope and duration;
    2. a severe increase in the price of petroleum products has resulted from such emergency situation;
    3. such price increase is likely to cause a major adverse impact on the national economy.

All three clauses had to be met.  It's arguable whether or not the first condition has been met, but if you so argued, you wouldn't have a hard time also arguing the second or the third condition.

However, in 1990 Congress amended the act:

permitting the President to use the SPR for a short period without having to declare the existence of a “severe energy supply interruption”

Also, the President can allow "exchanges of SPR oil
where oil is loaned and then returned with additional oil as a premium".

So, it certainly appears from the 1990 amendment that the President has the authority to use the SPR in the current situation, but whether it's right to do so remains in question. Indeed, Bamberger argues against it:

A spike in crude and product prices often stirs calls for use of the SPR. However, the SPR is intended by statute to ameliorate discernible physical shortages of crude oil.

We're in an interesting situation, and frankly not one that is covered by the 1975 legislation.  It's not a physical disruption that's causing us trouble, but a large spike in demand, particularly from China and India.

But here's the money quote from Bamberger and where I think Newt is right and Jonah is wrong:

the price of imported crude oil rose from roughly $4/barrel (bbl) during the last quarter of 1973 to an average price of $12.50/bbl in 1974. While no amount of strategic stocks can insulate any oil consuming nation from paying the market price for oil in a supply emergency, the availability of strategic stocks can help blunt the magnitude of the market’s reaction to a crisis.

So, in a year or so, prices tripled.  This was the "market reaction" to the crisis that the SPR was created to "blunt".

In January of 2007, oil was just below $50/barrel.  It has recently approached $150/barrel. This is definitely a similar "market reaction".  However, here the "crisis" isn't interruption of supply, but increase in demand.

Therefore, we've shown that tapping the SPR in the current circumstances, is in fact, allowed under statute, and also justified. As for "punishing the speculators for betting against America", well, the other reason for the SPR is to reduce the ability for people to use crude oil as a political weapon (yeah, right...how's that worked out?).  Certainly one could argue that speculators are doing just that.

As I've said before, I support limited tapping of the SPR, but only in conjunction with efforts to increase supply/decrease demand. And, I would want a plan to replenish the SPR as quickly as possible.

Of Newt's three points, I admit that this one is the weakest, and is the one that I would not be upset to be set aside, but I don't have a problem with it either, under my aforementioned conditions.

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