Thursday, January 25, 2007

Increasing Storage vs. Driving Smarter

I've been asked a number times recently what I thought about the president's plan to increase the Strategic Petroleum Reserve from its current maximum capacity of 727 million barrels to about 1.5 billion barrels.

My initial reaction is that expansion of the SPR will support oil prices and keep them from going lower because it increases marginal demand. However, the government will not be filling the expanded capacity all at once. It will do so slowly over a period of several years, so there shouldn't be much impact on world oil prices.

Yet I still have to wonder if storing all that oil makes sense. After all, oil is already stored. It is stored in the desert in Saudi Arabia. It is stored in Iran, Iraq, and Venezuela. The SPR merely transports oil from one storage facility to another. Does this make sense?

The purpose of the SPR is to provide a margin of safety in case one of our major suppliers decides to impose a boycott. That happened in the 1970s. However, despite some temporary shortages at that time, the only serious consequence was higher oil prices. And we saw that higher prices quickly eliminate shortages. What oil producer can resist saying no when the price is high enough?

I'm not convinced we need to expand the SPR. We still have enough room to store an addition 40 million barrels in the current SPR. In fact, we already have about 60 days worth of import protection.

Reducing consumption is far more effective than increasing reserves. The president also called for a 20% reduction in gasoline consumption over the next 10 years. This is not an unreasonable goal. But it won't be achieved with ethanol alone. The most promising technology on the immediate horizon to help reduce consumption is the plug-in hybrid. Several automobile manufacturers are planning to introduce these. Furthermore, demand for gas-guzzling SUVs is way down. Chrysler is even planning to bring the Smart Car to the U.S. We can immediately reduce consumption by a considerable amount simply by driving smarter. It looks like last summer's $3 per gallon gasoline price was all we needed to move us in the right direction.