SYNOPSIS: Releasing strategic oil reserves was the Economic thing to do.
The decision to release part of our Strategic Petroleum Reserve has been widely criticized. Even many commentators with no ax to grind seem convinced that there is something irresponsible about the move.
But they're wrong. We should be tapping our oil reserves; in fact, the big mistake was not using them months ago.
Put it this way: Why has the Organization of Petroleum Exporting Countries, derided as irrelevant only two years ago, suddenly become so effective again? The answer is that now, as in the oil crises of 1973-4 and 1979-80, circumstances have given OPEC what amounts to a temporary corner on the world oil market. Our long-run policy should be to encourage production and discourage consumption, so this doesn't happen again. But in the meantime we should try to prevent OPEC from taking full advantage of that corner. Releasing oil reserves to set a cap on prices — and making it clear that we are prepared to release more — will do exactly that.
Successful attempts to corner markets are rare, but they happen. A Japanese company managed to corner the entire world copper market in the mid-1990's (though it lost it all by overplaying its hand). The standard procedure is to surreptitiously buy up a large part of the supply of your chosen commodity, then pull some of that supply off the market, causing prices to soar for the rest. In effect, the market manipulator creates a temporary monopoly position for himself — the market corner — and exploits that temporary monopoly by selling some but not all of his stockpile at very high prices.
OPEC did not follow the classic procedure, but events have produced much the same result. Very low oil prices a few years ago discouraged independent producers; oil exploration fell off sharply. Then demand for oil surged as Asia recovered from its financial crisis and Americans bought ever more S.U.V.'s. The result is that for the time being, even with non-OPEC production at maximum, a few major exporting nations know that they have enormous market power. By producing a few hundred thousand barrels a day less than they could, they can drive prices on the oil they do produce to levels not seen in many years.
This situation won't last indefinitely. As long as we don't do something foolish like encourage consumption by cutting taxes on gasoline, new supplies of oil, together with falling demand in response to high prices, will eventually eliminate that market power. Until then the oil exporters have us, yes, over a barrel, and are exploiting their temporary advantage with gusto.
But if withholding a few hundred thousand barrels a day from the market can drive prices sky-high, putting a similar amount back in can bring them back down to earth — as demonstrated by the sharp drop in oil prices that followed the announcement of plans to tap U.S. strategic reserves. And Western governments have more than a billion barrels in reserve. Why not use those reserves to break the market corner, or at least to limit its effectiveness?
Some warn that if we supply more oil, OPEC will supply less. Indeed, yesterday Libya's oil minister made that threat explicit. But the logic of the situation suggests that this threat isn't credible. Oil producers know that they are getting higher prices for their oil now than they will in a year or two; the only reason they are not pumping as much as they can is that they believe that holding back will keep prices high. But if they know that attempts to drive up prices by restricting production will be offset by increased releases from Western reserves, they will have less, not more, reason to keep oil off the market. A credible promise (threat?) to use our petroleum reserves to prevent prices from going too high might well actually persuade OPEC to produce more than it otherwise would.
Remember that we're not talking about fundamental market forces here. This market is already being manipulated by a handful of exporting-nation governments — so why shouldn't the importing-nation governments also enter the game? We have a lot of influence over this market, if we choose to use it. And it would be not just a shame, but positively shameful, if we allow ourselves to be deterred from acting in our own interest because we're afraid to annoy the oil cartel.
Originally published in The New York Times, 9.27.00