The Fierce Debate over Managing Oil Prices

During President Barack Obama’s eight years in office, the Strategic Petroleum Reserve shrank by about nine million barrels. Under President Donald Trump it shrank by 57 million barrels. Those numbers looked significant at the time, but then came President Biden. In his first 21 months in office, the nation’s emergency supply of crude oil fell by 240 million barrels, according to Energy Information Administration data.

This deep drawdown looks scary. Before I joined The Times I wrote pieces with headlines such as “Keep the Lid on the Strategic Oil Reserve” (2000) and “Save Strategic Oil Reserves for When They’re Really Needed” (2012). I understand the concern of Representative Cathy McMorris Rodgers, Republican of Washington, who has blamed Biden for “depleting” the strategic reserve.

On the other hand, the Treasury Department has estimated that the Biden administration’s releases of crude oil cut about 40 cents off the retail price of gasoline — welcome relief to consumers at a time of four-decade-high inflation. Biden’s energy secretary, Jennifer Granholm, cited that estimate last week in a letter to Rodgers, the chair of the House Energy and Commerce Committee, and Frank Pallone Jr. of New Jersey, the committee’s ranking Democrat.

So it’s not a black-and-white issue. After talking to people on both sides, I think big sales of crude from the Strategic Petroleum Reserve when prices are high can be justified if the reserve can be replenished cheaply later, so the government comes out ahead on the transactions, and if the sales can be managed in a way that is not — and does not look — politically motivated. The first criterion is probably achievable most of the time. The second is trickier.

There is one argument against Strategic Petroleum Reserve releases that I think is somewhat silly. It’s enshrined in the name of a bill that Rodgers is sponsoring, the Protecting America’s Strategic Petroleum Reserve From China Act. The bill, which passed the House 331-97 on Jan. 12, would prevent sales from the reserve to any entity owned or under the control or influence of the Chinese Communist Party or to any other entity that intends to export the products to China. The flaw in the bill is that the oil market is global, and barrels are fungible. Additional supply from the United States will benefit oil buyers all over the world regardless of whether any particular molecules wind up going from the United States to China.

I also have my doubts about the Strategic Production Response Act, which Rodgers introduced in the House on Jan. 9. It would prevent the government from drawing down the Strategic Petroleum Reserve until it develops a plan to increase oil and gas production on public lands — except in case of “a severe energy supply disruption” that would cause “a major adverse impact on the national economy.” In her letter to Rodgers, Granholm wrote that the conditions in the bill “would make it harder to take such action quickly to increase supply when the market needs it most.” She also wrote that oil and gas producers “do not need another giveaway.”

Those issues aside, the underlying economic question is whether it’s practical to use the Strategic Petroleum Reserve to modulate prices — that is, to shave off both the highs and the lows — rather than just to deal with emergency shortages caused by, say, a pipeline burst or a refinery fire, which historically was the main mission of the reserve.

Those in favor of the idea include Representative Ro Khanna, Democrat of California, and Robert Hockett, a professor at Cornell Law School who has worked with Khanna to develop ideas for storing food as well as fuel to calm markets. Khanna wrote about the idea in a guest essay for The Times in June. Hockett has discussed it in several pieces of his own.

In an interview Tuesday, Khanna praised the Biden administration’s big sales of oil, which shaved off the highs, as well as the administration’s stated goal of buying back oil to replenish the reserve at prices of $67 to $72 a barrel. The administration is hoping that promising to buy oil in that price range will help set a floor under the price of crude, giving producers the confidence that drilling for more oil will pay off.

“I think President Biden had the guts to go against the past 40 years of worshiping unfettered free markets,” Khanna said.

Then again, you can imagine how this could go wrong. If oil goes very high and stays there, Biden or some future president could drain the Strategic Petroleum Reserve dry trying to lower the price. (A pilot program to start replenishing the reserve failed recently when no producers wanted to sell oil at a price the government was willing to pay.)

Hockett told me he believes that the government can manage to sell high and buy low — balancing the market and making a profit — by using statistical analysis to distinguish between speculative spikes and underlying price trends based on supply and demand. That’s plausible, if not certain. There are lots of times when it’s pretty obvious that a market is overbought or oversold, but no private player has the deep pockets to fight the crowd. The government, in contrast, is the ultimate deep-pocketed investor.

Politics are harder to deal with. It’s hard not to think that Biden sold oil to reduce gas prices last year at least in part to boost Democrats’ chances in the midterm elections. Even if it’s not true, the impression is unshakable. Hockett told me that one answer might be to give the job of buying and selling commodity derivatives such as futures and options to the Federal Reserve, which is relatively insulated from politics. Khanna, though, said; “I don’t know if you want to empower the Fed. You want some democratic accountability.”

Kevin Book, a managing director at ClearView Energy Partners in Washington, D.C., said the oil industry is divided over the Strategic Petroleum Reserve. Some small and fast-moving players don’t like releases from the reserve because the releases snatch away the opportunity for people with oil to make profits from high prices, while some big players appreciate having access to crude when commercial supplies are disrupted, he said.

Book said that if the government became a day-to-day market player, constantly suppressing volatility of prices through its purchases and sales, some of the private market participants who provide that function today would drop out, and private inventories of oil that are expensive to maintain might shrink. “The question for the government is, how do you play this role without inadvertently causing the thing you’re trying to prevent?” he said. When I asked Hockett about this, he emailed back that the people Book was referring to are speculators who don’t calm volatility; they amplify it.

This debate isn’t ending anytime soon.

Elsewhere: Early Retirement and Cognitive Decline

Maybe don’t retire early? A study of rural Chinese people found cognitive decline was faster among those who gained access to pension benefits at age 60 than among people who were otherwise similar but lived in parts of China that didn’t yet have access to the program. Getting benefits “substantially reduced social engagement, volunteering and activities involving mental acuity,” according to an article in the January issue of The Journal of Economic Behavior & Organization by Plamen Nikolov, an assistant professor of economics at Binghamton University of the State University of New York, and Shahadath Hossain, a doctoral student there. “We detect the most substantial impact of the program on delayed recall, a cognition measure linked to the onset of dementia,” the authors wrote. Previous research has found negative effects from “mental retirement” in high-income countries, including the United States.

Quote of the Day

“Despite having one of the greatest minds of their time among them, the castaways on Gilligan’s Island were unable to raise their technological level high enough to even build a boat (though the Professor is at one point able to make a radio out of coconuts). Similarly, if you stranded Intel’s greatest chip designers on a desert island, it would be centuries before they could start building microchips again.”

— Maciej Ceglowski, text version of a talk given on Oct. 29, 2016

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