[Mb-civic] Politics Dog the Oil Reserve

[Michael Butler]

http://www.latimes.com/news/opinion/la-op-victor22aug22.story

ENERGY

Politics Dog the Oil Reserve

An independent panel should be given control of the U.S. stockpile.
 By David G. Victor and Joshua C. House
 David G. Victor, adjunct senior fellow at the Council on Foreign Relations,
and Joshua C. House are in the Program on Energy & Sustainable Development
at Stanford University.

 August 22, 2004

 STANFORD ‹ With oil prices heading toward $50 a barrel, what would happen
if the markets really blew?

 Ever since the late 1970s, Washington's answer to such an event has relied
on oil stockpiled mainly by the federal government, to be released if market
instability warranted it. Today, the U.S. Strategic Petroleum Reserve
contains 666 million barrels ‹ nearly 65 days of imports ‹ worth nearly $30
billion at current prices. Our industrialized allies have similar stocks,
India has started one and China, whose oil imports are rising rapidly, is
expected to create a reserve soon. Through the International Energy Agency
in Paris, the major oil importers have agreed, in principle, to coordinate
their stockpiles. 

 Unfortunately, reserves in the United States and most democracies are
nearly feckless as a policy instrument. The legislation that created the
U.S. reserve gave the power to buy and sell stocks to a federal agency, now
the Department of Energy, that, in effect, passes the decision on to the
president. White House control automatically converts every key decision
into a highly political act.

 In July 2000, President Clinton's order to transfer some strategic reserves
to fill a newly created Northeast Home Heating Oil Reserve had obvious
political implications for Al Gore's presidential bid. In 1996, Congress
required the sale of more than $220 million of stockpiled oil to help pay
down the budget deficit, another political move, though one that, in
hindsight, looked wise when oil prices tanked two years later.

 The uncertainty of reliable production in Russia and Iraq, coupled with the
general threat of new terrorist attacks, makes for many worrisome scenarios.
But a cloud of political suspicion would hang over any management decision.
If President Bush released stockpiled oil to stabilize prices in an election
year, no matter how justified his action, he surely would be accused of
political pandering. And if he rightly refused to release oil because
speculative trading doesn't meet the standard of "severe energy supply
interruption," as called for in the 1975 legislation setting up the
Strategic Petroleum Reserve, would he face charges that he was rewarding his
oil buddies with record profits?

 One way to take the politics out of governing the Strategic Petroleum
Reserve would be to mechanize decision-making, such as by setting a price
trigger for sales and fills. President Reagan's Council of Economic
Advisors, among others, considered this option and wisely demurred. In the
1980s, the international spot market for oil was not fully developed; prices
were mainly driven by opaque long-term contracts, not market dynamics. Price
triggers act similarly to price controls, increasing the risk of creating
true scarcities in oil supply. Such automatic triggers would have smoothed
small gyrations in the oil market but failed when most needed to dampen
large price swings.

 There's a better way: independent management of the strategic reserve. In
contrast to an automatic mechanism, an independent authority would be able
to detect subtle economic and political shifts that determine our true
vulnerability to oil shocks. More important, such an authority would
depoliticize Strategic Petroleum Reserve decision-making, which would enable
us to use the stockpile for its originally intended purpose of providing a
credible bulwark against the most severe chaos in oil markets.

 The president could create an independent board to manage the reserve
within existing legislation, but that would not completely remove a
political taint. New legislation would better accomplish the job. Congress
and the president should look to the Federal Reserve as a model. The
Strategic Petroleum Reserve needs its own resources, with politicians
supplying broad guidelines for action and periodic review rather than direct
control. Such a change would not only affect the United States but would
also require remaking the International Energy Agency into something closer
to a central bankers' forum.

 New management for America's oil reserve would spark new thinking about the
optimal size and operation of strategic stocks. Until now, most public
debate has focused on the reserve's size. The International Energy Agency
suggests that its member countries keep a petroleum stockpile roughly
equivalent to 90 days of domestic consumption. In truth, the optimal size of
strategic reserves is not a single quantity but depends on political and
economic conditions. A competent independent authority would make it
possible to carry a smaller stockpile ‹ at lower cost. Because today's oil
prices are formed in highly liquid markets, the standard of "severe supply
interruption" is largely meaningless. The better standard is our willingness
to absorb price shocks. For that there is no simple answer, yet independent
economic authorities can make the wisest choices.

 More than 30 years after our first oil shock, the Strategic Petroleum
Reserve still wears polyester and bell-bottoms. A dose of market reform and
political independence can bring its fashion up to date and create a truly
useful tool for protecting the U.S. economy.




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