How incredibly silly can government be? Think of this.
Oil prices have fallen 55% in the last year. The trend defied every expectation and it’s been wonderful. It’s an impressive illustration of how prices work to reveal underlying resource realities.
Technology has blasted away the last decade’s wild and misguided fears of a shortage. Exports and production are at an all-time high in response to unprecedented demand. The stunning events have been a boon to consumers, as downward pressure keeps pushing on prices at the pump.
The market as an institution is giving us oil as never before. It is not failing. It is succeeding beyond belief.
“Experts” keep saying the trend is temporary but no one knows for sure. We could see $20 per barrel before year’s end.
And it is at this very moment, the Department of Energy is proposing that the U.S. add 5 million barrels to the “Strategic Petroleum Reserve.” This program is the hoary leftover from the era of President Ford. It pays oil companies for their products, as the DoE says, “to protect the United States from severe petroleum supply interruptions through the acquisition, storage, distribution and management of emergency petroleum.”
You can tell from the language that this is the most thrown-back program one can imagine. It illustrates a complete lack of understanding of the price system, which is the signaling mechanism that reveals shortages and surpluses in the market. Rising prices signals consumers to consume less and incentivizes producers to produce more. Falling prices signal plenty of supply, encouraging consumers to consume more and producers to produce less.
The price system actually works, unlike these pathetic attempts at government planning. The proposed purchases by the government constitute only one-half a day of production in the U.S. — as if an intervention so small would make the difference between prosperity and disaster.
If it is really necessary to have a Strategic Petroleum Reserve, it would also be necessary to have the same for carrots, beef, iPads, tennis shoes, wine, and so. But, you say, oil is special because it is really, really necessary, so we can’t take the risk. Nonsense. Food, housing, and smartphones are all really necessary but we would never trust government to manage the supply.
Take away our oil and we walk. Take away our food and we starve.
In any case, the Reserve in total covers not even two months of U.S production (which is about 10% of world production). Why not six months or a year? There is no rational way to decide.
And let’s say there really were some weird catastrophe that caused all distribution to stop. Prices would soar through the roof and inspire a gigantic increase in oil production from all over the world.
But let’s say, because of some foreign-policy issue, the U.S. stopped all imports, and then tapped the Reserve. It’s not the consuming public that would benefit. It would be the government itself, making sure that the military and all government agencies stayed running.
In other words, this program is not about you and me. To understand why the Reserve exists, look who benefits most directly: the oil industry itself. It’s a guaranteed market, a kind of subsidy just as food stamps are for big agriculture. Perhaps this is why this proposal is being made again right now, just as prices are falling so dramatically, hint hint nudge nudge.
The subsidy came about during a period in which oil prices were controlled by the government. The oil industry faced very serious financial pressure. The Reserved helped to alleviate that, a classic case of how one intervention leads to other interventions. The SPR was a fix for a “market failure” that wasn’t a failure of markets at all but, rather, a failure of government.
Oil prices haven’t been controlled since the late 1970s, completely removing any objective conditions for why this needs to exist at all. In fact, the only time we ever had gas lines was when we had a “Gasoline czar.”
What harm does the Reserve bring about? It’s a huge waste of tax money. Beyond that, dumping oil on the market from a government-mandated reserve puts downward pressure on the price and reduces the incentive to step up production right when it is needed most.
The Reserve is a perfect illustration of the dangers of any government program. Once one starts, it is extremely difficult to get rid of them. Here we are 40 years later, with massive increases in supply and the technology for refinement and distribution, and we still have this thrown-back central plan for stockpiling oil.
It needs to be completely abolished, just as Ronald Reagan suggested in 1980 (before he later changed his mind to favor its expansion). The SPR is just like the post office in this sense: it exists solely due to that magic combination of economic ignorance plus special-interest pleading.