Continuing to fill the Strategic Petroleum reserve means higher gasoline prices.
Have high prices at the pump been giving you sticker shock?

If so, we’re not surprised: With crude oil prices averaging nearly $35 per barrel and gasoline prices exceeding $1.75 nationally, prices are at record highs. While the impact on commuters is bad enough, the economic impact on many businesses, from airlines to trucking to agriculture and manufacturing, creates a significant drain on the economy.

Unfortunately, this unpleasant situation is poised to go from bad to worse.

In January, U.S. commercial inventories of crude oil dipped to their lowest levels in almost 30 years. Today, our inventories are 50 million barrels less than they were in early 2002 – below levels needed to cover supply disruptions. To make matters worse, cuts in OPEC oil production and summer driving are expected to further strain inventories, in turn forcing prices even higher.

As bleak as these statistics are, the U.S. government has a powerful tool that can tackle both problems. To reduce oil prices and increase inventories, we can cancel planned future deliveries over the next year of 52 million barrels of oil to the Strategic Petroleum Reserve (SPR).

Today, the reserve is 93 percent full, with 648 million barrels of oil. Over the coming year, the Department of Energy (DOE) plans to ship another 52 million barrels to fill the SPR to capacity, but there is no urgent need to do so.

Instead, oil destined for the reserve could be sold on the market to produce two benefits.

First, putting 52 million barrels of oil on the market over the course of a year would increase supplies in U.S. markets. Greater supplies would help bring down oil and fuel prices and enable our commercial firms to restock inventories to safer levels. Less expensive crude oil would lead to less expensive gasoline, home heating oil, jet fuel and diesel fuel, providing relief to consumers.

Second, selling this oil would produce an estimated $1.7 billion in revenues for the U.S. Treasury.

The Senate recently adopted a Levin-Collins budget amendment that would use this money to reduce the deficit as well as restore cuts in homeland security funding for first responders, firefighters and port security. These oil revenues represent real income to help meet real security needs here at home.

“Buy low, sell high” is a fundamental rule for success in the marketplace, whether for shares of stock, pork bellies or barrels of crude oil. This approach guided the SPR program for years – DOE put more oil into the reserve when prices were low, and less when prices were high. DOE abandoned this policy in 2002, when it began to fill the SPR without regard to the price or supply of oil.

At the time, DOE’s SPR career officials objected to this change: “Commercial petroleum inventories are low, retail product prices are high and economic growth is slow. The government should avoid acquiring oil for the reserve under these circumstances.”

Two years later, the SPR has more oil, but commercial inventories have much less, and our overall oil security has not improved. DOE’s removal of oil from the marketplace to fill the reserve during a period of scarce supplies and high prices further tightened supplies and boosted prices, driving oil companies to use cheaper inventory oil to meet demand instead of buying expensive new oil.

Goldman Sachs, a leading oil trader, estimates that continuing to fill strategic oil reserves through this year in the U.S. and Europe would add more than $4.25 per barrel to crude oil prices; petroleum economist Philip Verleger estimates that the fill over the past two years has already added $8 to $10 per barrel.

These increases, in turn, boost gasoline prices by as much as 25 cents per gallon. A glimpse of the potential market impact of reversing course came the day after our amendment passed: oil prices on the New York and London exchanges dropped by $1 per barrel on the news, only to climb again after DOE and House Budget Committee representatives announced opposition to halting SPR deliveries.

We support adding oil to the Strategic Petroleum Reserve, but not at any price. We can complete filling the SPR when oil doesn’t cost $38 per barrel and gasoline isn’t $1.75 per gallon at the pump. Right now, stopping additional deposits and selling the oil on the market would be a win-win-win for American consumers, taxpayers and our security.
Sen. Collins is chairman of the Committee on Governmental Affairs. Sen. Levin is ranking minority member of the Governmental Affairs’ Permanent Subcommittee on Investigations.

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