Alan Reynolds

Hurricane Katrina slashed U.S. oil production by 1.4 million barrels a day  -- the global equivalent of suddenly losing two-thirds of all oil produced by Iraq or Kuwait.
"President George W. Bush has responded quickly to Hurricane Katrina," said a Bloomberg report, "suggesting that Hurricane Ivan last year taught him a lesson about opening up the reserve." Energy Secretary Bodman announced he had "approved a request for a loan of oil from the Strategic Petroleum Reserve" and "continues to review other requests as they come in.''

 That announcement should have been made by the president at least a week before the hurricane actually hit. He should have said, "The United States stands ready to replace all oil production loss resulting from the hurricane for as long as necessary." If that had happened, oil would now be at least $10 a barrel cheaper than it is. Since 1991, however, it has always been safe for traders to bet against the SPR being used in such a serious way.

 The new SPR loans did arrive a few days sooner than the expensive11-day lag following Hurricane Ivan. But a loan is just a loan. To loan oil from the SPR (rather than sell it) does not add a drop to world oil supply over the medium term. On the contrary, it ultimately reduces world oil supply because those who borrow oil have to return more than they borrowed, as interest.

 Moreover, supplying oil only at the initiative of U.S. refiners delegates the management of SPR to those with a conflict of interest. As producers of crude, as well as refiners, integrated oil majors are naturally reluctant to encourage the president to do anything that might frighten oil speculators and drive the price down.

 Yet explains, "The Strategic Petroleum Reserve exists, first and foremost, as an emergency response tool the president can use should the United States be confronted with an economically threatening disruption in oil supplies." Although oil interests would have you believe "economically threatening" means something other than high prices, the legislative language is clear that Congress intended the SPR to be used in cases of "significant" supply disturbances, which are defined as those causing "a severe increase in the price."

 Since November 2001, the Strategic Petroleum Reserve (SPR) has been increased by 108 million barrels and is now up to 700 million barrels. Those extra 108 million barrels were imported, or had to be replaced with imports, making the SPR a price-support program for oil producers.

 New reports quote interested parties who offer the following laundry list of reasons why the SPR should be tapped as little as possible, if at all:

Alan Reynolds

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