Tapping oil reserve: good policy or politics?

It takes a major disruption in America's oil supply to trigger release of the nation's emergency reserves. But do screaming drivers qualify as a disruption?

In the minds of many politicians, they do. This is, after all, an election year. No matter that SUV owners are partly to blame for increased gasoline prices. No matter that the price of crude, when adjusted for inflation, is still below the 30-year average. Voters are hurting, say politicians, and tapping the nation's rainy-day supply can provide relief.

But many energy analysts are alarmed at this suggestion, which is being pushed by more than 75 lawmakers and is under consideration at the White House.

"It's a dumb idea, and it's all politics rather than looking at the real problem," says Douglas Bohi, an economist and energy specialist at Charles River Associates, a consulting firm.

When the government interferes in oil prices, he says, it starts down the slippery slope of market manipulation. "You depend on price signals to correct problems," he says. If prices are controlled, there's no signal to consumers to conserve fuel, or to drillers to increase production.

But politicians are feeling pressure to act. On Tuesday, House lawmakers voted to set up an additional 2-million-barrel reserve for the Northeast, which was hit hard this past winter by the spike in heating-oil prices.

The bill also reauthorized the president's power to withdraw oil from the strategic petroleum reserve - about 570 million barrels of government crude stored in tanks and natural caverns in Texas and Louisiana. The reserve was created in response to the 1973-74 OPEC oil embargo, when many Arab nations cut off exports to the US. President Jimmy Carter instituted price controls and gas rationing, and Americans lined up for blocks for a turn at the pump.

Today, the president can release oil from the reserve but, according to the law, only in the event of a serious disruption in supply - as President George Bush did during the Gulf War.

He's not allowed to use the reserve as a price-adjusting tool. If the president did release oil for this reason, "Congress would be all over him," says a spokesman for the Senate Energy and Natural Resources Committee.

Not necessarily. Mr. Clinton actually sold off some of the reserve earlier in his tenure, at Congress's request, to help with the budget deficit. Now, lawmakers are calling for a "swap," in which the president would release some oil, but replace it with other oil.

One suggestion is to release "sweet" crude from the reserve to the market and replace it with "sour" crude. Sweet crude contains much less sulfur than the sour version, and is easier to distill into a product like gasoline. Economists say such a move could increase gasoline supplies and, thus, reduce prices.

The administration did something similar just this month, when oil refineries in Louisiana were cut off from normal tanker deliveries because a commercial dry dock collapsed into a major shipping lane, blocking it.

Hoping to avert a possible shortfall in diesel and gasoline, Energy Secretary Bill Richardson authorized the release of 1 million barrels of oil to the refineries. The companies will resupply the reserve when the shipping lanes reopen - and pay interest in the form of more oil.

Lawrence Goldstein, president of the Petroleum Industry Research Foundation, says that if political pressures force the government to act, a swap is the least offensive option. At least this way, he says, the reserve's inventory levels are not reduced.

But it would set a bad precedent, argues John Maroney, economics professor and energy expert at Texas A&M University in College Station. "It could put future presidents under political pressure to use the reserve for political purposes," he says.

"I'm 100 percent in favor of using the strategic reserve to head off a crisis," he says, "but I'm not convinced that the current levels of gas prices represent a crisis."

(c) Copyright 2000. The Christian Science Publishing Society

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