Todays spiraling gas prices appear to be as much America’s fault as well as “Big Oil” or any of the Islamic Oil producing nations.

A large part of the blame can be shouldered by a program established 32 years ago designed to buffer Americans from the threat (imaginary or otherwise) posed by volatile governments in many oil producing nations. President Bush in his State of The Union speech proposed to spend $65 billion from the government’s general fund to double the size of the Strategic Petroleum Reserve.

For most Americans, the reserve, where 700 million barrels of oil have been stored since the late 1970s, is mostly an article of faith: Few know that it’s located deep underground in four sites on the Gulf Coast, and because those sites are considered vital to national security, hardly anyone has seen them.

But it’s time to take a closer look at the reserve’s purpose, its usefulness and its cost.

Before we invest another $65 billion in this underground bank of oil, we should ask ourselves what we’re really getting for the money.

The Strategic Petroleum Reserve sites are remote and not open to the public.

The oil sits far out of sight, some 2000 feet below ground, in caverns located in thick salt deposits.

The caverns are made by a technique called “solution mining,” which basically involves running water down into the salt and sucking out saltwater until a significant hole has been hollowed.

The salt wraps itself around the oil like plastic, so the caverns don’t leak. They are, in fact, a miracle of salt engineering, and if it were possible to see them, they’d probably be as big a tourist draw as the Hoover Dam.

But the petroleum reserve is pretty much invisible — and so is its ambiguous history.

The government chose to put the oil near the Gulf of Mexico because there are many oil refineries nearby and because shipping is readily available.

The sites are Bryan Mound near Freeport, Texas; Big Hill near Winnie, Texas; West Hackberry near Lake Charles, La.; and Bayou Choctaw near Baton Rouge, La. Most of the oil in the reserve comes from Mexico and the North Sea.

It costs the federal government $21 million a year to maintain the oil reserve, and about 1,150 people work for the oil reserve. About 125 are government employees, and the rest are contracted workers.

The reserve was established in 1975, after the first Arab oil embargo cut exports to the United States, as a way to fight back against any future threats to our energy supply. Some called the reserve our own “oil weapon.”

By the time it was completed in the early 1980s, however, embargoes were no longer a threat. Significant amounts of oil were being traded on the open market, so oil producers could no longer control who bought their oil.

Then the Strategic Petroleum Reserve gained a second life as an insurance policy against oil shortages and high prices.

During the 1991 gulf war, the reserve stood by ready to pour more oil into the market in the event the conflict paralyzed production in the Persian Gulf. By allaying fears of a shortage, it theoretically could keep oil prices from spiking.

Since the election of George W. Bush, administration officials have resisted using the reserve at all.

At the start of the Iraq war, rather than tap into the reserve, the Bush administration asked Saudi Arabia to pledge to put an extra 2.5 million barrels of oil a day on the market, if needed. Ironically, the reserve had been created to free the United States from the influence of foreign oil producers, but our unwillingness to use it created a new type of dependency.

Saudi Arabia has indicated it will work to keep oil prices lower, at least in part to further American diplomatic goals with Iran.

This raises a new question about the reserve: If we didn’t use it in 2003, when it might have come in handy, will we be any more likely to use it once we’ve made it twice as big?

Some people say the Strategic Petroleum Reserve is more important as a psychological aid (like the stashes of food survivalists keep in case of catastrophe) than as a practical solution to energy security.

In many ways, it is a relic of cold-war thinking living on even though the very idea of energy security has changed.

We now import about a million barrels of oil a day in the form of goods from China. China imports the oil, uses it to make products, and we depend upon those products.

The reserve can do little to protect us in this more complicated modern world. If we double the size of the reserve, we will be paying $65 billion for more of the same psychological reassurance, and little else.

Rather than increase the size of our petroleum reserve, we should address its problems. One of these became obvious in 2005, after Hurricane Katrina and Hurricane Rita:

The reserve is located on the Gulf Coast where America has 60 per cent of its oil production and refineries. Natural disasters (or terrorist attack) that affects our active energy supply will affect our backup supply as well.

The president’s current doubling plan would keep the entire reserve on the Gulf Coast, which means we would go from having all our eggs in one basket to having paid for twice as many eggs and put them all in the same, hurricane-prone basket.

And then there is the fact that, today, refined gas and diesel make up 60% of our imports. The reserve, on the other hand, stores only crude.

After Katrina, the reserve quickly released 11 million barrels of crude oil, but that couldn’t replace the millions of barrels of gasoline no longer flowing from the area’s refineries.

European tankers filled with gasoline were soon steaming toward the United States — like the “cavalry,” in the words of a government report, the United States is to be its own cavalry, it should have three or four regional reserves of gasoline at various locations around the country.

Perhaps the biggest problem with the reserve is its costs never appear at the pump.

The United States spends about 2 billion dollars a year maintaining the reserve, and billions more filling it, but because the money comes from the general fund, rather than from a “security tax” on gasoline, those costs are hidden from the consumer.

The reserve is only a small part of the larger story of hidden gasoline costs in the United States.

For the last 100 years, the government has used money from the general fund to subsidize energy to keep it as cheap as possible for Americans, ostensibly to encourage economic growth.

Now those hidden costs – which include tax breaks for the oil industry, accounting giveaways, direct subsidies for some oil and gas production and the cost of protecting oil and natural gas shipping lanes (about $39 billion) according to Doug Koplow, who studies energy subsidies for Boston-based Earth Track.

While many Americans feel current gas prices are high, they are in fact much lower than they would be if we counted in the costs of these subsidies, including the cost of maintaining the reserve.

We receive an unitemized bill for the subsidies when we pay our taxes on April 15, but we never see any sign of them at the pump.

Deceptively low gas prices discourage conservation, making Americans more vulnerable to supply disruptions of all sorts.

You could even argue this policy, which encourages Americans to produce 45 percent of the world’s carbon dioxide from auto emissions (even though we own only a third of the cars), is speeding global warming and making hurricanes more likely to swamp the refineries, oil installations and petroleum reserve sites on the Gulf Coast.

Any way you look at it, we need to stop subsidizing supply and start managing energy demand. But even if we determine that we need more oil, or gasoline, in the reserve, we should at least pay for it with a 5- or 10-cent-per-gallon tax on gasoline.

2006 was the year that oil prices came close to breaching eighty dollars per barrel. This was despite the fact that there were no significant supply interruptions and oil demand actually fell in industrialized countries.

This raises the question of what caused the spike.It turns out there is good reason to believe that record oil prices may be due to our own strategic oil reserve, which the Bush administration may have been manipulating to drive up prices for the benefit of its clients.

Any finding of manipulation would go far beyond corruption and be close to economic treason. That is because when oil prices increase America must pay more for its imported oil. That increases the trade deficit and our foreign debt.

Alternatively, one can think of price manipulation as the equivalent of a tax increase on American families that is paid to foreign governments, including Iran.

While some small energy scandals are under investigation by Congress, the big enchilada is the strategic oil reserve, which may have been “strategically” manipulated to drive up oil prices. The key to understanding this manipulation is demand and supply and oil storage capacity.

The last three years have seen rapidly rising oil prices, and a tight oil market has meant that even small increases in demand have had large price impacts.

During this period the Bush administration purposely expanded inventories of the strategic oil reserve, which rose from 600 million barrels in May 2003 to 700 million barrels in August 2005. The administration therefore increased demand by 125,000 barrels per day, and oil prices rose from $30 dollars per barrel to $70 dollars.

As oil prices rose, Wall Street became increasingly engaged in commodity speculation This is where storage matters. As speculators entered the market the spot price of crude oil rose above the futures price.
However, buying spot oil means taking delivery, which requires storage capacity. By adding to the strategic reserve, the administration not only increased oil demand but also increased storage capacity because the oil it bought was stored in the strategic reserve’s caverns.

This helped speculators by adding storage capacity vital for cornering the market.

The oil market is full of smoke that provides perfect cover for corruption. Every price blip calls forth explanations in terms of Chinese demand, more violence in Nigeria’s delta region, cold weather, threats from Venezuela’s Hugo Chavez, or heightened tensions over Iran’s nuclear program.

The strategic reserve is the perfect vehicle for corruption since transactions can be cloaked in the veil of national defense.

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