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Tempted By A Rainy-Day Fund

worker standing among wellhead and valves at Bryan Mound, an SPR storage site
Bryan Mound, one of the sites of the Strategic Petroleum Reserve. Photo courtesy the U.S. Department of Energy.

The Strategic Petroleum Reserve was conceived as a rainy-day fund for the country’s crude oil supply.

Like any such fund, it is most useful when it is when it is sufficiently “funded.” The SPR is also like any rainy-day fund in the way its mere existence creates the temptation to declare a flood emergency and tap into its waiting resources when the conditions outside are no worse than a light drizzle – or maybe even when someone has only spotted a few clouds on the horizon. President Barack Obama succumbed to that temptation in 2011; now it seems President Donald Trump may be in danger of making the same mistake.

Anonymous sources recently told Bloomberg and The Wall Street Journal that the administration is actively considering taping the SPR if gasoline prices continue to climb ahead of the midterm elections in November. The sources said that options included a relatively small test sale of 5 million barrels and a larger release of 30 million barrels.

The president has been frank in his remarks, on Twitter and elsewhere, criticizing OPEC for climbing gasoline prices in the United States. But history suggests that releasing any number of barrels, whether 5 million or 30 million, would have a temporary effect on prices at best. As I explained in 2012 when Obama was contemplating a second SPR release, lower prices stimulate demand, which means that consumers use up the extra oil faster, leaving the country with reduced reserves and prices that will almost certainly climb again once consumers use up the excess supply. Some experts warned Bloomberg that a release might have no noticeable effect at all, depending on its size and timing.

Sources told the Journal that the International Energy Agency has also indicated concern about global oil supply. There is no single culprit for the supply outages this year. The significant economic and political turmoil in Venezuela has had catastrophic effects on that country’s output, and renewed fighting in Libya cut into exports as well. American sanctions against Iran could also hobble its exports in the near future.

OPEC and Russia had previously agreed to hold back 1.8 million barrels per day in 2018 due to fears of oversupply, but in June OPEC members agreed to increase output by 1 million barrels a day in light of the shift in crude oil’s relative supply and demand. Some observers remain skeptical that this step alone will meet increased demand fully, however, and others worry that it will do so only at the price of erasing spare capacity in Saudi Arabia and elsewhere.

Despite these constraints and concerns, oil prices are notably volatile and respond to hundreds of factors that affect both the supply and demand for the commodity, and thus its daily price. Sometimes the price of crude can move sharply on the mere expectation of news. Last Monday, for example, prices dropped more than 4 percent on speculation that a summit between Trump and Russian President Vladimir Putin might lead to a deal to boost production. Whether such a deal was even discussed, let alone agreed, was not clear by the end of a day that was dominated by Trump’s comments on Russian interference in American elections (and his skepticism thereof).

Even if the prices resume the climb they began several years ago, that does not mean the United States tapping its reserves in response is warranted, or even necessarily helpful. The reserve was designed to mitigate the effects of large-scale wars or natural disasters, not the vagaries of the marketplace – or politicians’ uneasiness about their party’s ability to hold on to legislative majorities. Not only would a nonstrategic release of oil fail to do much about gasoline prices in the long term, it would leave the United States less prepared for any genuine emergency that could impact our supply.

Energy Secretary Rick Perry has indicated that, to the extent the choice is his, he has no interest in drawing on the SPR. Last month, he told reporters that the reserve is “there for emergencies” rather than to manage gasoline prices, though he also acknowledged that the decision is ultimately in the president’s hands. Perry is a former Texas governor, and knowing something about the oil industry is a pretty basic requirement of that job.

A drawdown is not imminent, according to the sources that spoke to the Journal, which leaves open the possibility that the administration may not go through with it at all. We can only hope so. Compared to his predecessor, Trump is arguably less focused on re-election and inarguably less concerned with pussyfooting around hard issues. With luck, this will mean that common sense will triumph over political expediency, and Trump will leave the SPR alone unless and until a real emergency arises.

When Congress first established the reserve, OPEC’s 1973-74 oil embargo and the resulting rationing were still fresh in American minds. Lawmakers wanted to ensure that a severe interruption to energy imports wouldn’t have the same disastrous effect on the country in the future.

Today, America is producing far more oil than it did 45 years ago. We are an emerging export power, and the IEA recently predicted that the U.S. is likely to overtake Russia as the world’s largest oil producer as soon as 2023. For someone who wants to “make America great again,” tapping the SPR under present circumstances simply does not make sense. You don’t want to spend your rainy day fund when the streets are dry.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s recently updated book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us,” and Chapter 4, “The Family Business.” Larry was also among the authors of the firm’s book The High Achiever’s Guide To Wealth.

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