Tapping the Strategic Petroleum Reserve

Yesterday, the United States announced it will release 30 million barrels of oil from the Strategic Petroleum Reserve as part of a coordinated effort by the International Energy Agency to place an additional 60 million barrels on the market to reduce oil prices.

The move comes at a crticial point in the global economic recovery: While oil prices have been trending downward, uncertainty over energy combined with problems in the Eurozone and the US housing market are threatening the global recovery.  The Federal Reserve acknowleded as much earlier this week when it lowered its growth forecasts.  The optimism of the fourth quarter of last year has given rise to pessimism as the recovery enters an unprecedented second soft patch and some have even raised fears of a double dip recession. 

In this context, the release of oil--though it equals only about 15 days consumption by the US--is timely.  It made sense to jump proactively on a downward drift already underway.  The announcement has already succeeded in taking a bite out of oil prices which dropped 7% yesterday. 

When intervening in markets there are normally several steps that governments employ.  First they talk.  A statement from the Secretary of the Treasury that the US favors a strong dollar for example, is usually sufficient to quiet fluctuations in the dollar.  The IEA did the equivalent of this when it said in May it would release oil if OPEC failed to raise production.  If mild talk doesn't workthe next step is to speak more forcefully.  Because financial markets can be unforgiving once they smell weakness, this may not work and can even have the opposite effect.  The next step for those with the resources is actual intervention in markets.  When intervening, the element of surprise is useful as it catches speculators off guard--ideally stemming their appetite for risk.  Yesterday's intervention seems to have been a success insofar as it has brought prices down but they are still above $100 per barrel. 

While I do not quarrel with yesterday's action, I think the Administration and the oil consuming nations need to go far beyond countering OPEC--or in this case making up for its failure to raise production to offset Libyan disruptions.  They need to end the oil cartel.

The IEA, created in 1974 in the wake of the first oil shock within the OECD framework to counter OPEC, has done a good job in its history of fostering cooperation on energy matters among consuming nations.  It requires its members to maintain large stockpiles of oil as a counterweight to OPEC.  However, just as the IEA has evolved, so too, has the world geopolitical situation.  The Western powers are now involved militarily in the Middle East--the geographic heart of the OPEC cartel--to a larger degree than at any time since colonial mandates wound down after World War II.  The convulsions in the region that have placed the West in the role of supporting some OPEC governments such as Saudi Arabia and Iraq while championing rebellion in others such as Libya gives us more leverage than we have employed to date to break up OPEC.

Specifically, as I argued earlier this month, the US and NATO should make as a condition of military aid that receiving governments agree to a timetable to withdraw from OPEC.

Second, the US has other tools.  The Justice Department has broken up hundreds of international cartels over the last two decades.  All it needs to take on OPEC is clarification of the Foreign Sovereign Immunity Act act, legislation both houses of Congress have at one time passed.

Third, eight OPEC countries are also WTO members or observers and the WTO forbids cartels.  As argued compellingly by Senator Frank Lautenberg, the oil consuming nations, led by the US should file trade actions in the WTO against OPEC.

Over a century of economic thought and case examples have shown that cartels are bad.  When the cartel deals with something as vital as oil, it is not only bad but dangerous.  OPEC--an organization that has done nothing good for the world and much ill--is vulnerable right now.  The global economy may be even more vulnerable.  The US and, indeed, all the oil consuming nations, should use every tool at their disposal to end the OPEC oligopoly.