In 1973, the United States squarely faced a new geopolitical challenge: Oil dependence could constrain America’s freedom to movement on foreign policy and national security objectives. President Gerald Ford, in addressing the United Nations on the subject of the oil embargo, said “Sovereign nations cannot allow their policies to be dictated or their fate decided by artificial rigging and distortion of world commodity markets.
No one can foresee the extent of damage, nor the end of the disastrous consequences if nations refuse to share nature’s gifts for the benefit of all mankind.” Indeed, the 1970s oil crises was followed by strong global economic distress and contraction for many years across the globe, impacting not just the U.S. economy but paving the way for major financial defaults in Latin America and elsewhere. The creation of the US Strategic Petroleum Reserve was a specific response to prevent this kind of situation from happening again.
Henry Kissinger notes in his autobiography “Years of Renewal” that it was “intolerable” that “countries of 40 million can blackmail 800 million people in the industrialized world…” Kissinger proposed a system to “redress the bargaining imbalance between (oil) consuming and production nations.” Kissinger’s response was threefold:
1) an effective program of conservation
2) establishment of consumer nation “ninety day reserve stocks of oil” where, Kissinger noted, “in an emergency, consuming nations would then share available stocks according to pre-established criteria.”
3) creation of financial facilities to smooth out flows of the producers’ surplus funds and to provide financial assistance to consumer nations in the event of a crisis
This is the context of the creation of the US Strategic Petroleum Reserve (SPR) and the International Energy Agency (IEA) emergency stockpiling program.
The SPR was not created to be a tool only used in the event of war (though we are engaged in military activity in Libya, Yemen, and Afghanistan so one could argue we are at war) or in response to a major natural disaster (though the SPR is useful for that purpose). It was created to be a tool to redress the bargaining imbalance to allow the United States greater maneuver in its foreign policy despite the fact that we are a major importer of oil and to prevent global economic damage from undue manipulation of oil markets.
The release of oil from the system last week was aimed to remove the fear factor out of the oil market and thereby both protect the stability of the global economy and additionally ensure that oil producers are discouraged from taking undue advantage of market instability and uncertainty.
We believe this aim is in line with the original spirit of the creation of the reserve and is sound policy. The release, while small, signals the market that this administration and our European allies are ready and willing to deal with any future disruptions, a signal that should keep rampant speculation at bay.
American refining companies should support the release by bidding for SPR barrels and allowing these barrels to displace other foreign cargoes that will thereby overhang the international market and create commercial inventory builds that could be helpful if and when a future disruption comes down the road.
The SPR allows more flexibility to intervene to prevent a humanitarian crisis in Libya or potentially ban oil purchases from Syria because these decisions can be made without fear that they will spur an oil crisis that will damage the global economy. The IEA emergency stockpiling system provides this geopolitical benefit.
The IEA stocks are an effective tool to protect the global economy from major oil supply disruptions, current or future. We should support the administration’s use of this excellent element to our energy security policy and think about whether similar institutions (a major coordinated reserve of liquefied natural gas (LNG) supplies, for example) could be useful in the future.
Photo by bjearwicke.