Strategic Petroleum Wars: About Politics, Not Economics

Politics is, well, political, and as such, few battles in Washington are fought over principles as much as over power and image. That’s why in many political debates both sides are wrong because they fight for goals no American should want—namely, for the power to control society in their own way. That both parties share the same underlying myths about government and its role in the economy has been on elaborate display during the current bickering over whether the president should release oil from the Strategic Petroleum Reserve (SPR).

As I pointed out in a previous blog, the President shouldn’t just release some oil from the SPR, as Congressional Democrats want—he should release all the oil and close the SPR permanently. The reserve’s origins and purposes are entirely based on myth—that the 1973-74 OPEC oil embargo decreased imports so dramatically that a massive oil shortage resulted (read why this is wrong here). The political benefits of this myth are plentiful. It outsources blame for the energy crisis to foreigners—in particular, Arabs. It also creates a climate of fear that showers extraordinary powers on politicians and bureaucrats. Finally, it permits political saviors to rescue us from high gas prices.

Once the myth is accepted by both sides, however, facts can be jettisoned, and arguments can proceed on purely political grounds. Should the reserve be used or not?  Economic-sounding arguments are discussed, but in the end, the question isn’t economic—it’s political.

Economics explains how people will act in a market under the forces of supply and demand that are represented in prices. In a market, an action is worth taking if output exceeds input—that is, if the sales price of the finished good is sufficiently greater than the prices of the materials required to make it. In this way, we know that consumers valued the final good more highly than its inputs, producing profit or wealth for society. On the other hand, if consumers value the inputs more than the final good, the result is a loss signaling to the business that society demands those resources elsewhere in the economy.

That’s economics, but the decision to release oil from the SPR isn’t based on the forces of supply, demand, profits, nor prices. Rather, it’s pure politics, and in politics, you can’t be wrong.

Republicans argue, as Rep. Jim Sensenbrenner (R-WI) did in Politico yesterday, that although “the president is authorized to tap into [the SPR] if an emergency of significant scope and duration threatens to cause a price increase that is likely to have a major adverse impact,” no such crisis exists. But how do Republicans know that? Democrats say that such a crisis does exist. In a world without prices, everyone can be right since no one can be proved wrong. In a market, reserve owners know whether to hold or release oil from reserves based on the prices of doing one or the other—without prices, the decision just becomes arbitrary. Would it make you feel good to release the oil now or later?

Republicans wouldn’t feel good about releasing the oil because it’s bad politics. “The President is using a national security instrument to address his domestic political problems,” writes House Speaker John Boehner. In other words, “I don’t want the president to benefit politically from this decision”—“even if consumers suffer,” I can almost hear Democratic Rep. Ed Markey add.  Of course, when the Republican-held-Congress authorized sales from the SPR in 1996 for deficit reduction, they sang a different political tune. Why? Because the SPR is about politics, not economics.

 Read here why the SPR isn’t a national security issue, how the market deals with price shocks better than government, and why the arguments for the SPR are built on fiction.