It started with the 1973 oil crisis. The Middle Eastern oil exporting nations, led by Saudi Arabia, were angry about losing to Israel in the Yom Kippur War. Since Israel had been supported both economically and militarily by Western Europe and the United States, the Saudis and their allies responded with a new weapon: oil.
Declaring an embargo, these countries stopped exporting oil to the western allies of Israel, creating shortages of gasoline and sending the price of petroleum products through the roof. Before the embargo was stopped six months later, price of oil rose from $3 a barrel to $12 a barrel. The twin shocks of rising prices and market shortages triggered a tidal wave of political actions in the United States, almost none of which were based on economic reality (or even on common sense).
Cheap foreign oil had shut down a lot of US domestic oil production, slowing exploration for new fields. While many of those older oil fields could begin production again, the lag between drilling for oil and pumping refined gasoline into the tank of your car meant that there were bound to be shortages and rapidly rising prices. All of America panicked and rushed those huge American land yachts to the nearest gas station to fill up the tanks.
I remember that at a hotel where I was working during what became known as the ‘Middle East Oil Crisis’, about once a month we caught someone stealing gas in the parking lot with an ‘Oklahoma Gas Tank’. For those of you not lucky enough to be from Texas, that’s about six feet of rubber hose.
This rationing system, like almost all rationing historically, was completely backwards. Consumers, fearing the day when they would be unable to start the family car, waited in line as often as they were allowed, buying tiny amounts of gasoline to ‘top off’ a tank. A more logical system would have mandated a 10-gallon minimum sale, and allowed people to purchase every day of the week. Most of the panic among consumers was perpetuated by—if not caused by—illogical government mandates.
President Nixon also imposed wage and price controls for the second time during his presidency. (Why not?—they had already failed spectacularly the first time.) Oil producers were allowed to raise prices on production from new wells, but not on that from existing wells, despite rising inflation that made operating the old wells increasingly costly. Naturally, the oil producers simply shut down the old wells completely, worsening the oil shortage. Since increased regulations and price restrictions discouraged new production, there was also little incentive for new exploration or energy innovation.
Suddenly faced with the reality of sudden oil shortages, Congress created the Energy Policy and Conservation Agency in 1975, tasked with the responsibility of safely stockpiling an emergency supply of petroleum. The kinds of emergencies envisioned ranged from war, to another embargo, to a major hurricane striking the Gulf Coast. Up to a billion barrels of oil was to be stored underground in salt domes. (And no—the risk of contamination of the water table is very low since the salt domes are far below the water table.)
While the emergency reserves have never actually been filled to capacity, under presidential authority, the stockpiles have been tapped successfully several times to offset temporary shortages and forestall impending price increases. During the Arab Spring uprisings that disrupted exports and following the shutdown of Gulf Coast refineries from Hurricane Katrina, millions of barrels of oil were auctioned off to nearby refineries to stabilize production. Such releases from the reserves have generally been successful, keeping employment relatively high and forestalling short term shortages of gasoline and heating oil.
Far less successful have been the times that presidents have ordered releases in an attempt to lower the market price of gasoline. In total, the United States has the capacity to store slightly more than a billion barrels of oil, and has the theoretical ability to transfer that oil back to refineries at the rate of 4 million barrels of oil a day. These numbers sound staggeringly high, but in reality, it is nowhere near the amount of oil the world uses daily. Our entire reserves, if stocked to capacity, would supply the petroleum the world currently uses for about one day. Technically, this is a flea fart in a hurricane. And America has slightly more than half the reserves currently being stockpiled globally.
Today, with rising inflation and skyrocketing energy prices, there are once again calls for governments to impose price controls. Mexico is close to putting limits on the price of food, almost guaranteeing shortages and starvation. Albania is drafting legislation to curb price hikes on oil and gas. Some politicians in Washington are proposing that the price of heating oil and gasoline be determined by the Department of Energy. And President Biden has just authorized the release of a million barrels of oil per day from the strategic reserves for the next six months in an attempt to lower the price of gas at the pump.
There are three big reasons why this is a bad idea.
First, there are currently only 585 million barrels of oil in the reserve (roughly half of the capacity of what those salt domes will hold). If we release the oil as planned, there will be roughly 450 million barrels remaining as we enter hurricane season. Should a major hurricane cripple production and refining along the Gulf Coast, we might see gas prices even higher than we have now.
Second, Congress is a bunch of cheap bastards and when it comes time to buy oil to fill those reserves, they always opt for the cheapest grades of petroleum on the market. Our reserves are not filled with West Texas Intermediate. No—our government fills those reserves with ‘sour’ crude, oil with very high sulfur content that is relatively more expensive to refine into gasoline. While none of that oil has been purchased yet, it is far more likely that this dirty oil will be used to produce heating oil rather than gasoline. And don’t forget that oil has to be replaced, so, when the government finally gets around to refilling the reserve, it will end up buying more crap oil but paying a higher price for it.
And third, price fixing by Washington never works. America uses about 100 million barrels of oil a day and suddenly adding an extra 1% of dirty oil to the supply on the market.... will do nothing pricewise. And I can prove it. Do you remember how much the price of gasoline dropped last November when the government released 30 million barrels of oil to help lower prices?
No, and neither does anyone else.
Nixon would have been a populist like Trump but he didn't have the sense of the demographics of his market. He had enough of a feel for the mood of the electorate to get himself elected; to get the power he lusted for, but not enough beyond that to do some serious good with his power. He wound up imploding. He was smart, but lacked the over-riding moral trust that those who voted for him could be fully trusted to manage their own affairs. So he embraced price controls and started the inflationary spiral that Jimmy Carter ran with. I remember well the gas lines and double digit inflation. Trump understood the popular electorate, but unlike Nixon and Carter, he actually thought the people knew how to manage things for themselves if the government got out of the way.
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