In Aesop’s fable, a foolish grasshopper ignores the warnings from a prudent ant that the bountiful crop of summer food will disappear once winter arrives. The grasshopper plays and feasts while the ant labors and stores up reserves. When winter eventually arrives, the ant survives. The grasshopper does not.
It is a parable President Biden ought to take to heart. America’s Strategic Petroleum Reserve (SPR) is intended for use in times of genuine emergency, not as an economic tool to lessen the blow of rising energy costs.
President Biden recently announced the release of approximately 180 million barrels of oil from the US Strategic Petroleum Reserve. While this is not the first time that a US president has used the SPR for political purposes, i.e., to reduce voter pain at the pump, the scale of Biden’s action is unprecedented. It is also dangerous and short-sighted.
The US has never drawn more than c. 30 million barrels from the SPR in a given year. The largest one-time release came in September-October 2000. President Clinton, facing a doubling of oil prices from a low of $20 per barrel, authorized the release of 33 million barrels in hope of lowering prices ahead of the George W. Bush vs. Al Gore presidential election in November 2020.
Two years later, in 2002, a supply shock hit energy markets when Venezuelan oil workers went on strike to protest Venezuelan President Chavez’s increasingly oppressive regime. Three million barrels a day of global production went suddenly offline. The Bush administration debated releasing oil from the SPR, but eventually decided against it, concluding that the move was not merited short of a much larger supply disruption. Later in his administration, Bush would sell 26 million barrels from the SPR in the wake of hurricanes Ivan and Katrina. President Obama also sold 30 million barrels in 2011 following the crisis in Libya. Otherwise, Presidents Obama and Trump largely maintained the reserve at near full capacity.
The US Strategic Petroleum Reserve was established following the 1973-74 oil embargo. Then, OPEC producers attempted to squeeze the American economy and influence US foreign policy towards Israel. America came to learn the dangers of reliance on foreign powers for its energy security. The SPR became part of a broader solution alongside supply diversification, increased domestic production, and technological innovation to maintain US energy security.
The purpose of the SPR is to “counter a disruption in commercial oil supplies which could threaten the U.S. economy.” The SPR was never intended to be used as a backdoor method for price controls. President Clinton’s Secretary of the Treasury, Larry Summers, affirmed as much when he said, to the apparent displeasure of his boss, “the SPR was created to respond to supply disruptions, [not] simply to respond to high prices or a tight market.” The temptation to use the SPR for political ends, or short-term economic relief, undermines America’s energy security and exposes the nation to unnecessary risks.
Energy markets guru Daniel Yergin points out that yielding to political temptation “drains oil from the reserves that might be needed in a more serious situation in the future.” Tapping the SPR also distorts price signals in the market, which leads to overconsumption and discourages new production from coming online. The effect is also short-lived. Prices tend to return to their natural, market determined level.
The Biden administration has not shied away from its economic rationale for releasing reserves, blaming rising gas and oil prices on Russia’s invasion of Ukraine, and arguing that tapping the SPR will benefit the American consumer. However, oil and gas prices were rising long before Russia invaded, and the Biden administration was already quietly tapping the reserve last year in an attempt to ameliorate them.
Indeed, 50 million barrels were drawn in 2021. SPR inventory declined 11% from 638 to 568 million barrels from January 2021 to the end of March 2022. An additional release of 180 million barrels will bring inventory down to just over half the total capacity, placing the reserve close to the statutory minimum of 350 million barrels. Should a genuine emergency arise, the US will have just over ten months of remaining supply at the statutory maximum draw of 30 million barrels per month.
That’s risky. If we’ve learned anything over the past two years, whether from the pandemic, the Texas power grid failure, or Russia’s invasion of Ukraine, it is that unexpected events can arise suddenly. We are already in danger of a wider European war. State-sponsored cyberattacks against critical infrastructure are a real risk. And we cannot rule out the possibility of hostilities in Taiwan or the South China Sea.
Whatever the potential disruption, the lesson of the ant and the grasshopper is that it is unwise to eat into supply that ought to be reserved for the harsher seasons that inevitably come.
As the name implies, the U.S. Strategic Petroleum Reserve should be considered a strategic asset, not an economic one. It belongs to the realm of national security, not domestic politics.
Far better to keep the US Strategic Petroleum Reserve full to help America meet the challenges of an unpredictable future.
