Budget talks are still underway in Washington, specifically in terms of how to pay for the transportation bill and various other goodies on the menu. Our Congress critters have stumbled across a plan though, claiming that they’ve figured out how to generate some extra cash without raising taxes. That sounds fantastic until you read into the details because they’re talking about selling off part of the Strategic Petroleum Reserve.
U.S. lawmakers on both sides of the aisle figured this month they had hit on a clever way to fund everything from new drug programs to highway maintenance: sell off part of America’s strategic oil reserves, a supply cushion that no longer needs to be so large.
The notion, embedded in a House of Representatives bill that passed earlier in July and in a Senate transportation bill proposed on Tuesday, has met with criticism from energy experts and economists, many calling it the right idea, but the wrong time…
The White House is reviewing the highway funding bill that includes tapping $9 billion of oil from the SPR from 2018 to 2025, an official said Tuesday.
For the geniuses in Congress who are considering this move, allow me to point you to another bit of news which came out at almost exactly the same time.
US Oil Futures Break $50
U.S. oil futures closed below the psychologically important $50 level—possibly signaling more declines to come and a retest of the March lows.
West Texas Intermediate settled down $1.67 at $49.19 per barrel, the first close below $50 since April 2. U.S. government data Wednesday showed a bearish increase in crude inventories last week of 2.5 million barrels, slightly more than expected. The stronger dollar was also a negative.
Just to be clear here, the price of American oil futures didn’t break $50 going up. It’s going down again. The oil in national strategic reserve is worth less than half of what it was two years ago. Do you happen to recall what you paid for that oil the last time you put any into the reserve? Have you ever heard of the concept of buy low and sell high? Well this is the opposite of that. Oh, and you’re looking over this proposal at the same time that the White House just unchained Iran to up their production and shove prices further down.
It’s no wonder that people complain when we keep electing leaders who have never run anything as complicated as a lemonade stand.
Here’s the second problem you’re going to run into. We’re already seeing oil rigs being stacked and taken off line because the price of crude is so low that it’s not profitable to drill. We’re flooding the market. But if you start pulling billions of dollars worth out of the reserve and selling it on the open market, you’re competing with American producers and driving the price down further. That’s not just bad fiscal policy… it’s also going to further erode jobs in one of the only successful industry sectors we have.
If Congress really wants to tinker with this there is already another idea on the table. Lift the domestic oil export ban. It will increase the market slope a bit, allow us to compete in overseas markets, nudge the prices up into the profitability zone and put people back to work. Then, if we market aggressively, we can scoop up some European market share and ride the demand wave a bit. If you really insist on selling off some of the SPR, wait until we can drive the prices up closer to $75. After you do that, flood the zone, drive the prices back down closer to $50 and buy the reserves back for the SPR. It may sound like dirty pool but OPEC has been doing it for decades.
This is a horrible idea. Everyone who isn’t running for office next year thinks so. Let’s get a grip and not sell off our emergency reserves at a loss, folks.