It Isn’t A Strategic Popularity Reserve

One of the challenges of being president is that people often demand that you do something to solve their problems when there is really very little you can do that will not make matters worse.

This is a trap for all presidents, but it has been particularly troublesome for President Obama. He prefers to let others take the lead on controversial initiatives (for example, he pushed the much-maligned “Obamacare” health reform only after congressional Democrats did the heavy lifting of actually designing the legislation), yet his political survival instincts routinely trump all other considerations. Therefore, when pushed to act, act he will – constructively or otherwise.

This is why the president, for the second consecutive year, is looking to address the country’s rising gasoline prices and his own less-than-vigorous poll numbers with another unhelpful incursion into America’s Strategic Petroleum Reserve.

Obama raised the issue of a possible emergency oil release last week during a meeting with British Prime Minister David Cameron, a United Kingdom official with knowledge of the discussion told Reuters. White House Press Secretary Jay Carney said the president and the prime minister had reached no agreement. But this wasn’t the first mention of a possible strategic release in the past few weeks. Top U.S. officials, including Energy Secretary Steven Chu and Treasury Secretary Timothy Geithner, have also broached the idea.

The White House’s rationale is that rising gas prices threaten the potential for economic recovery by inhibiting still-sluggish consumer spending. This is a valid concern, one that Federal Reserve Chairman Ben Bernanke also raised in congressional testimony this week. Oil prices remain well over $100 a barrel, and retail gasoline hit an average of $3.842 on Monday after climbing for 10 straight days. With summer approaching, demand is likely to increase, possibly lifting prices above the current record high of $4.114, set in July 2008.

If Obama gets his way, this would be the sixth release of oil from the SPR since its creation in 1975. Two of the earlier releases, however, were sales of excess oil to reduce the federal budget deficit. The SPR, therefore, has only truly been used three times. The first was during the run-up to the first Gulf War, and the second was in response to the devastation of domestic oil production by Hurricanes Katrina and Rita. The third and largest was, Obama claimed, a necessary response to supply disruptions caused last summer by the conflict in Libya. As I wrote at the time, however, there was no oil shortfall then. The president was responding not to low supplies but to high prices.

This time Obama will find making the case that the country really needs more oil even harder. Former energy policy officials and industry analysts have, in fact, expressed doubts as to how quickly the market could even absorb the release of reserve oil.

Any release, or even the prospect of a release, of strategic reserves can have only a transient effect on prices. Prices rebound once the oil is consumed, and any temporary reduction in price stimulates demand, so the excess fuel is consumed faster. When the dust settles, we have less oil in reserve and we have consumed more fuel than we would have in the first place. Last summer’s release brought only a brief dip in prices, which then rebounded until fears of a new global economic slowdown and the end of the summer driving season pushed them back down in the autumn.

The most serious problem with a non-strategic release of strategic reserves is that it would leave us less prepared to respond to a genuine supply emergency. The 30 million barrels the president drew from the reserve last year has yet to be replaced. As a result, the reserve now holds only 696 million barrels of crude, around 96 percent of its 727 million barrel capacity. Another release of similar size would shrink the reserves to below 92 percent of capacity.

An unnecessary drawdown of reserves is particularly dangerous now because of the higher-than-usual risk of a real supply disruption. Up to 20 percent of the world’s oil supply passes through the Strait of Hormuz. Iran has threatened to try to close the strait in response to tougher international financial sanctions aimed at stopping its nuclear program. A potential strike by Israel against Iranian nuclear installations would instantly lead to military activity in the Gulf, which would lead in turn to higher shipping and insurance costs, even if tanker traffic was not completely blocked. Strategic reserves here and in other nations provide a crucial buffer against any temporary disruption of Persian Gulf supplies. Prematurely drawing down such reserves amid the current tensions is risky to the point of recklessness.

But the president’s strategic concerns do not appear to extend much beyond his own election campaign in November, and there is an inverse relationship between prices at the pump and his support at the polls. An ABC/Washington Post poll reported that about half of those who make less than $50,000 a year consider the higher gas prices we have seen recently to be a “serious hardship.” Among that group, the president’s approval rating has dropped eight points since gas prices began their climb last month.

Perhaps most troubling for Obama, 54 percent of people said in a New York Times/CBS poll that they think the president has the ability to control gas prices. Hedging his bets, while looking into the possibility of a strategic oil release, Obama has also embarked on a quest to lower expectations. “There’s no such thing as a quick fix when it comes to high gas prices,” he said. “There’s no silver bullet. Anybody who tells you otherwise isn’t really looking for a solution – they’re probably just looking to ride the political wave of the moment.”

The president is absolutely right about this, and he should take his own advice. There is no quick fix to high gasoline prices, and that includes a pointless drawdown of our strategic reserves. As always, the forces that will constrain prices are increased supplies, a topic on which Obama continues to bob and weave in deference to his party’s anti-fossil-fuel lobby, and the higher prices themselves, which will reduce demand and thus keep production and consumption in balance.

The president should tap the strategic reserve when there is a strategic reason to do so. The outward signs of this will be lines at the gas pumps and the inability of refineries to obtain all the crude they want to buy. It isn’t a Strategic Popularity Reserve, so the president should stop looking at his poll numbers when deciding whether to dip into it.

About Larry M. Elkin 534 Articles

Affiliation: Palisades Hudson Financial Group

Larry M. Elkin, CPA, CFP®, has provided personal financial and tax counseling to a sophisticated client base since 1986. After six years with Arthur Andersen, where he was a senior manager for personal financial planning and family wealth planning, he founded his own firm in Hastings on Hudson, New York in 1992. That firm grew steadily and became the Palisades Hudson organization, which moved to Scarsdale, New York in 2002. The firm expanded to Fort Lauderdale, Florida, in 2005, and to Atlanta, Georgia, in 2008.

Larry received his B.A. in journalism from the University of Montana in 1978, and his M.B.A. in accounting from New York University in 1986. Larry was a reporter and editor for The Associated Press from 1978 to 1986. He covered government, business and legal affairs for the wire service, with assignments in Helena, Montana; Albany, New York; Washington, D.C.; and New York City’s federal courts in Brooklyn and Manhattan.

Larry established the organization’s investment advisory business, which now manages more than $800 million, in 1997. As president of Palisades Hudson, Larry maintains individual professional relationships with many of the firm’s clients, who reside in more than 25 states from Maine to California as well as in several foreign countries. He is the author of Financial Self-Defense for Unmarried Couples (Currency Doubleday, 1995), which was the first comprehensive financial planning guide for unmarried couples. He also is the editor and publisher of Sentinel, a quarterly newsletter on personal financial planning.

Larry has written many Sentinel articles, including several that anticipated future events. In “The Economic Case Against Tobacco Stocks” (February 1995), he forecast that litigation losses would eventually undermine cigarette manufacturers’ financial position. He concluded in “Is This the Beginning Of The End?” (May 1998) that there was a better-than-even chance that estate taxes would be repealed by 2010, three years before Congress enacted legislation to repeal the tax in 2010. In “IRS Takes A Shot At Split-Dollar Life” (June 1996), Larry predicted that the IRS would be able to treat split dollar arrangements as below-market loans, which came to pass with new rules issued by the Service in 2001 and 2002.

More recently, Larry has addressed the causes and consequences of the “Panic of 2008″ in his Sentinel articles. In “Have We Learned Our Lending Lesson At Last” (October 2007) and “Mortgage Lending Lessons Remain Unlearned” (October 2008), Larry questioned whether or not America has learned any lessons from the savings and loan crisis of the 1980s. In addition, he offered some practical changes that should have been made to amend the situation. In “Take Advantage Of The Panic Of 2008” (January 2009), Larry offered ways to capitalize on the wealth of opportunity that the panic presented.

Larry served as president of the Estate Planning Council of New York City, Inc., in 2005-2006. In 2009 the Council presented Larry with its first-ever Lifetime Achievement Award, citing his service to the organization and “his tireless efforts in promoting our industry by word and by personal example as a consummate estate planning professional.” He is regularly interviewed by national and regional publications, and has made nearly 100 radio and television appearances.

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