Another Misguided Quick Fix Idea From Nancy Pelosi

Speaker Pelosi has now called on President Bush to release oil from the Strategic Petroleum Reserve (SPR). This is the latest Democrat's frantic search for political cover to "fix" a problem they have helped create.

Releasing oil from the SPR because gas costs $4 a gallon is a terrible idea. The SPR was created to avert a catastrophic economic collapse in the event of a major supply disruption. This week gasoline inventories in the U.S. rose by 1M barrels. Oil prices are going up because increases in demand, particularly in the emerging economies of China and India. gasoline consumption has actually dropped (demand destruction & substitution behavior) in the U.S. for the first time as a result of higher gas prices.

The Democrats have been arguing passionately against increasing domestic oil production. One of their arguments has been that this eventual production would have a negligible effect on gas prices at the pump. Whether this is true or not, releasing oil from the SPR would have a very small impact on gas prices, if at all. The price of gasoline has not risen nearly as much as oil input costs to the refiners. Releasing some oil from the SPR might lower the price of oil a bit, for a very short period of time, but would have a minimal effect on the price of gas. And oil released from the SPR now will not be available when we have a major supply disruption.

This blog supported suspending additional purchases to the SPR, which Congress enacted about 2 months ago. The SPR is over 95 percent full. Continuing to buy oil for the SPR at record high prices when the reserve is almost full doesn't make sense from a cost-benefit standpoint.

But we live in a world where the chance of a major supply disruption is real. As Iran presses forward with nuclear weapons and missile technology, Israel may have no choice at some point but to attack Iran. Iran has promised to shut down the Strait of Hormuz if they are attacked. If this happened, oil would go to at least $200/barrel and the economic shock to our country would make 1973 look like a holiday.

This is the reason for the SPR. Not political pandering in an election year.