Economist Philip Verleger looks at the size of the US Strategic Petroleum Reserve, and then looks at the world’s hot spots, and sees a way to solve some of the problems of the latter with the former. He has contributed this guest post to The Barrel blog.
Russia’s adventurism in Ukraine, ISIS’s alarming advances in Syria and Iraq, China’s economic slowdown, and the continuing US consumer malaise share a common cause: high oil prices.
Russia could not afford its aggressive moves against Eastern Europe if oil sold for $60 per barrel rather than $100. ISIS’s aggression would grind to a halt if sales of oil from its captured areas were cut off. US consumers might spend more but for their constant fear of higher gasoline prices.
Today, the global economy’s burden of high-cost oil can be removed for a year or two if two countries — the United States and Saudi Arabia — cooperate. The United States’ role would be to sell the almost seven hundred million barrels of oil held in its strategic petroleum reserve. The addition of this oil to global markets would bring prices down to $50 if the second player, Saudi Arabia, simply did nothing, that is, maintained its current production. Should this happen, crude prices could be halved.
The policy is predicated on the fact that the United States no longer requires its Strategic Petroleum Reserve. The reserve was created at a time when the nation was very dependent on imported oil. The dependency is in the past. The Reserve no longer serves the purpose for which it was developed. It can, however, be used as a strategic asset today.
Lower oil prices caused by sale of oil from the reserve would benefit the United States, Saudi Arabia, Europe, and almost every country in the world. The losers would be Russia and ISIS.
Russia would suffer because it is the quintessential “petro state.” The nation requires high oil prices to survive. Low prices would depress its GDP four or five percent and put the economic solvency of its two national stalwarts, Gazprom and Rosneft, at risk. Both companies could be bankrupted by low oil prices, just as Enron was more than ten years ago. This threat would prompt senior officials at both companies to put enormous pressure on Vladimir Putin to back down from his belligerent stance.
Lower oil prices would also undercut ISIS. This terrorist group relies on oil revenue from the fields it has occupied. The crude seeps into the market through various channels, very likely at significant discounts to world prices. The organization’s income stream would dry up if prices fell. If this happens, the cash-starved extremists would likely find it much harder to continue operations.
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Lower crude prices today might also offer a modest prop to the faltering economies of China, Japan, Europe and the United States. Real benefits would be seen in the US. Historically, expanding consumption increases the nation’s growth.
Since 2008, though, consumers have shown little willingness to return to their old ways. Stagnant wages and rising medical costs are the primary causes of the malaise but high gasoline prices contribute. Gasoline today captures more than three percent of total consumer expenditures. Consumers would have an extra $130 billion or so to spend on other things if gasoline spending fell to two percent of total expenditures. This would add a modest one percent to GDP directly and an additional amount indirectly. Europe would see similar but more modest benefits.
There is, of course, a downside to lower crude oil prices. Progress toward US energy independence would slow. Some companies would stop drilling in the oil-boom states. Others would reduce their efforts.
Such a development would not be all bad, though. Serious permanent damage is being done to many areas in the rush to drill wells and get fields into production. A drilling slowdown would allow more orderly progress. New techniques that boost recovery while causing less environmental damage could come on line.
In addition, a cut in the expansion rate of US oil production would allow the United States to address the oil export question in a more careful fashion. One can even imagine a rational strategy being developed.
Saudi Arabia, too, would gain from slowing US production. Right now, the surging US output is leading some to call for the Saudis to cut back. Oil sales from the US strategic reserve that reined in US expansion could create short and long-term benefits for us and the Kingdom. Saudi Arabia would also gain from an enfeebled ISIS.
In sum, there are many good reasons to sell US strategic stocks, reserves now superfluous given the changed US situation. Such sales will be resisted, however, by those who cling to the idea that this oil must be held for use in a real emergency. To these individuals I ask a simple question: What constitutes an emergency if not a potential land war in Europe (as suggested by Washington Post columnist Anne Applebaum) or the threatened spread of ruthless terrorists across much of the Middle East?