Burning the Surplus
Eric J. Cholankeril
President Clinton’s recent decision to release thirty million barrels of oil from the Strategic Petroleum Reserve sets an extremely dangerous precedent. But more than that, it is a sign that the United States is increasingly drunk on the current atmosphere of economic success. With no obstacles in sight, we have even started to remove elements of our crucial national safety net, hoping to prolong our success by risking more.
The oil reserve was created after the Arab embargo of 1973, to be used in a national emergency -- in other words, a war, an embargo, or an Iraqi invasion of Kuwait. But apparently it doesn’t take much these days for a situation to qualify as a national emergency. By releasing the oil, the United States is sending a clear message that it intends to use all of the resources it has available to control the price of oil. Much as the Federal Reserve buys and sells bonds on the open market in order to control interest rates, the government is now using its oil reserve as an economic tool.
But by lending out the national gas tank to oil companies, the Clinton administration is sacrificing a fundamental element of our national security for the sake of a short-term market intervention. Is that responsible, or even sensible? For one thing, it is not even clear how long the relief on oil prices will last. The oil companies are essentially borrowing the oil from the U.S. government, meaning that they eventually have to pay it back plus interest. So while the price may dip down, the issue is far from dealt with.
How can the Clinton administration lower prices and keep them low? Well, it’s fairly obvious that releasing oil from an emergency reserve was a last resort option, unless there’s a secret underground oil storage facility that no one knows about. So in order for their release of five percent of the reserve to be at all effective, speculators must believe that they would release even more oil if the need arose. (Secretary of Energy Bill Richardson, the incompetent who bungled the Wen Ho Lee case, had been pushing for a whopping ten percent of the reserve to be released.)
But this brings us back to the fundamental point, which is that the reserve is really meant only for national emergencies. So the government can’t possibly release much more without being strongly criticized for jeopardizing our national security. Everyone realizes this, which is why the release of the oil may turn out to have been a complete waste. Speculators may bid up the price of oil, knowing that the Clinton administration won’t be able to respond without causing serious risk to the Gore campaign.
The main damage done was to set a very bad precedent. Future administrations may look back on this and figure, hey, we could use the reserve to interfere in the market too. It may even become acceptable policy to do so. Why would the Clinton administration make such a poor decision?
The sad truth is that Governor Bush is right that this was somewhat of a political ploy. The relief will last through the fall; prices will probably not rise until after the election in November. President Clinton ultimately made the decision after Gore decided to take a tougher stance on the issue. Indeed, Clinton has probably succeeded in pushing off, at least for a few months, any inflationary effects that may threaten to destabilize the economy.
It’s too bad the oil may not be around when we need it. But who cares, right?