Necessary Roughness

An Associated Press report on Fox News does a decent job of capturing both sides of opinion behind President Bush’s desire to release oil to the markets in order to offset supply shortages resulting from Katrina.

I’m not optimistic about the effects on price. According to a 2004 Congressional Research Service paper (PDF):

Net imports of petroleum to the United States averaged an estimated 11.2 million barrels per day (mbd) during 2003, while total daily petroleum consumption exceeded 20 million barrels. While daily volumes will fluctuate, scheduled deliveries of RIK oil to the SPR between October 2004 and April 2005 will average roughly 135,000 b/d. If diverted to the market, this would represent less than 1% of U.S. demand for oil. The amount of oil potentially entering the market, relative to the size of the market, is the reason that some analysts discount the practical importance of altering the planned SPR fill.

The paper notes that crude oil accounts for 40% of the cost of gasoline, about 13% is attributable to distribution and marketing costs, and about 30% result in state and federal taxes. It concludes:

At least two obstacles exist that might prevent the RIK oil from having a significant effect. First, the amount of oil is small, less than 1%, of U.S. requirements, and even less of the world market. If any other oil producer chose to reverse the effect of the RIK oil on the market, that could be accomplished with an offsetting reduction in supply. Second, refineries in the United States, the link between the crude oil and the gasoline markets, are operating at nearly full capacity, making it unlikely that additional supplies of crude oil, in the form of the RIK volumes, could be refined and distributed as a net increase in motor gasoline.

High crude oil prices in the world market are influenced by political as well as economic forces. The high gasoline prices facing U.S. consumers reflect those high world crude oil prices and are sustained by a number of conditions in the gasoline market. The high utilization rate of refineries, the fragmented specification of regional gasoline blends, the low inventory balances, and the scarcity and high cost of conforming imported gasolines suggest that the gasoline market might remain tight even if additional crude oil appeared on the market.

If we want cheaper gas, we need to elect officials that will release the restrictions on refinery construction and upgrading, reduce the number of government-mandated blends, and allow companies to explore in Califorinia and Florida state waters as well as certain far-away places. A gasoline tax holiday wouldn’t hurt either.