International media is in a frenzy over the latest executive move being weighed by President Donald Trump. Earlier last week, reports emerged from unidentified White House sources that the president was considering selling off some of the federal government’s private stash of oil, known as the Strategic Petroleum Reserve (SPR). Reportedly, the administration is actively considering tapping into the nation’s emergency supply of crude oil as political pressure grows to rein in rising gasoline prices. Options under review range from a 5-million-barrel test sale to the release of a much larger volume—somewhere around 30 million barrels. This would be a unilateral move by the US. But an even larger release is possible if it were to be coordinated with other nations.
Concerns about oil prices are not baseless. The national average gasoline price rose to $2.89 by July 13, up 63 cents or 28 percent from that date a year ago. The US gasoline price average is expected to remain high through early September, capping off anywhere from $2.85 per gallon to $3.05 per gallon by Labor Day. Trump has certainly been vocal about his displeasure on this, posting the following tweet over a month ago:
Oil prices are too high, OPEC is at it again. Not good!
— Donald J. Trump (@realDonaldTrump) June 13, 2018
Prior to that tweet, on July 4 Trump posted the following:
The OPEC Monopoly must remember that gas prices are up & they are doing little to help. If anything, they are driving prices higher as the United States defends many of their members for very little $’s. This must be a two way street. REDUCE PRICING NOW!
— Donald J. Trump (@realDonaldTrump) July 4, 2018
There are different views from market analysts on what results would be from an SPR release and whether it’s an overall smart idea. Whenever there’s talk of tapping the reserve to address high prices, many are quick to point out that artificially playing with the market is short-sighted. As we all know, fluctuations in price, especially in regards to commodities, are natural in any economy. Production levels respond to consumers, and consumers to price—they call that supply and demand in Econ 101. There’s no reason to tinker with the system every time a price tag goes higher than we would like it to be.
Others are urging the feds to drain the SPR just to get it off the government’s hands. Storing the nearly 680 million barrels that make up the reserve is not free. The costs of maintaining the massive SPR storage facilities deep in Gulf Coast caverns in Louisiana and Texas runs anywhere between $65 and $80 per barrel. One thing is for sure: a substantial influx of oil into the global or even just the US market would at least temporarily low prices. And hurt oil exporting nations.
It is not surprising that one of the most ferocious critics of the option to tap SPR is the Islamic Republic of Iran. On July 16, a senior Iranian oil official urged President Trump not to use the SPR to push prices lower and instead drop sanctions on Iran’s crude exports. “My advice to you, Mr. President, is to avoid touching the SPR,” said Hossein Kazempour Ardebili, Iran’s representative to OPEC. Ardebili suggested instead that Trump should “cool down and give up sanctioning Iranian oil,” referring to restriction on the country’s petroleum sector set to kick in by November. In other words, Iran is suggesting an alternative solution to rising oil prices: Buy ours!
Yes, we understand why Iran would prefer that the US not sanction their oil as opposed to, well, sanctioning it.
But then there’s the assumption that current prices and future fluctuation are all inextricably bound with Iranian oil production. It’s a bit more difficult to contemplate why Iranian officials would think this is true.
In truth, the administration probing the SPR option highlights an important shift in the strategic reality surrounding energy. It is one that any country that relies on oil exports for its livelihood should take to heart.
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A Bit of History
Everyone understands that our modern world runs on fossil fuels. Just as in the past when highly demanded commodities, from tea or spices to opium, largely influenced the direction of geopolitics (and even kicked off wars), so too is the nature of petrol. While this dynamic has many repercussions, one of its features is the possibility for countries to weaponize their hold on oil to hurt opponents.
This is exactly what occurred in the early 1970s.
The 1973 oil crisis was triggered by a collective embargo proclaimed by the members of OPEC. It was targeted at nations perceived to support Israel during the Yom Kippur War that had taken place in October of that year. The initial nations targeted were Canada, Japan, the Netherlands, the United Kingdom, and the United States. It later extended to Portugal, Rhodesia, and South Africa. In truth, the only substantial direct assistance during that conflict came from the United States. President Nixon authorized Operation Nickel Grass, a strategic airlift to deliver weapons and supplies to Israel in order to replace its material losses, in mid-October. But why not collectively punish the entire West?
The embargo had a devastating effect. The global price of oil quadrupled by 1974 to nearly $12 per barrel. In the US, people experienced enforced energy rationing. In Holland, there was widespread use of horse and buggies for transportation.
The crisis was a wake-up call to the US and its allies. The world’s dependence on oil could be turned against it on the whim of the cartel bosses in the Middle East. There needed to be a way to ease this substantial leverage OPEC and its members had—essentially the ability to hold the world hostage in response to any regional policy issue they didn’t like. It was in reaction to the crisis that the US along with European countries set up the International Energy Agency to maintain a coordinated framework to react to any future disruption of global oil supply. The following year, the US established its own independent reserve.
Over the years, SPR has been used to address some particularly rough patches. Most had to do with logistical challenges that disrupted the market. One of the more famous instances came in September 2005. Following Hurricane Katrina, all Gulf of Mexico oil production, which equates to about 20 percent of domestic production, was shut down. In addition, import terminals in the region were closed. Some pipelines and several refineries were inoperable. In response, President Bush ordered the sale of 11 million barrels from the SPR.
But Middle East conflict has also been the cause of tapping the reserve. In our current state of affairs, this is worth noting.
In 1991, President Bush (senior) ordered the release of reserves. The decision came immediately following his announcement that US and allied war planes would begin bombing Baghdad. As a result of this decision, oil markets remained remarkably calm throughout the Gulf War. As then-Energy Secretary James Watkins stated: “We have sent an important message to the American people that their investment in an emergency supply of crude oil has produced a system that can respond rapidly and effectively to the threat of an energy disruption.”
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Tables Have Turned
Today, the original rationale for establishing the SPR has vanished. The United States used to import more than half the oil it consumed. Today, it’s only a quarter. And our biggest foreign source is also the least worrisome: Canada. The chance of being blackmailed by Middle Eastern nations is roughly zero.
What the SPR can do is be a backup for the inevitable consequences of making tough foreign policy decisions in the Middle East. In 1991, the SPR option allowed the United States to maneuver without risking devastating repercussions to oil supplies. Similarly, as the administration is going through with reactivating Iranian sanctions, the SPR is one of the tools that can allow that to take place without upsetting energy markets.
Of course, there are other methods as well. At the end of the day, the oil sector is a market. It operates like other markets do. If there is a void, actors can and will come in to fill it. US government teams have already negotiated with Saudi Arabia to ensure that global markets remain adequately supplied after the deadline. Producers such as Saudis, the United Arab Emirates, and Russia have announced their intention to increase supply once Iran’s oil comes under sanctions.
In summary, the SPR allows the US (and its allies) to operate without fear of backlash to energy. Whether or not Trump had this in mind, he essentially announced this in his tweets earlier this week. It is fascinating to observe but not altogether surprising: Global oil value began a sharp decline the very day Trump “demanded” OPEC lower prices.
