Putting Strategic Back in the Strategic Petroleum Reserve

Why must we always forget the first word of the term “Strategic Petroleum Reserve”? I read this afternoon in this article by Matthew Yglesias on Vox that the move to sell petroleum out of the reserves was “not a very ‘strategic’ move”. Respectfully (since I normally like Mr. Ygelsias’s work very much, as well as the Vox site generally), I must disagree.

In brief, I think that the Mr. Yglesias fails to think strategically enough. View the problem globally: Petro-regimes from Saudi Arabia to Russia are engaged in open hostilities in the Middle East at present – and don’t forget this is happening in a downward cycle for oil prices. Ordinarily, such activities undermines oil production and scares off new investment in the industry – thus driving up (or at least providing support for) prices. So… with that being said, I wonder.. (in an era where we have seen Vladimir Putin invade a Western leaning state (Ukraine), while his troops may be responsible for shooting down a civilian airliner (MH17)) why on earth would these regimes want to support oil prices?Hmm.

But… was the decision sell oil… well… STRATEGIC?

Absolutely! First, as wisely noted by Mr. Ygelsias, and highlighted in this column before, low oil prices are a net positive for the American economy. Second, there is the obvious reduction in the economic health of places like, say, Russia, that may not be overly friendly to our interests. On top of the short-term effect of supplying further weakness to the oil and gas market, this sale also provides a budgetary band-aid for future shortfalls, meaning we do not have to worry about the fiscal cliff until at least 2017. Finally, this move sends a long-term signal to other unfriendly states (Venezuela and Iran, I’m looking at you) that we can flood the market with oil anytime we feel like it – and thus erode the public receipts they expect to receive… Perhaps this means that they don’t like us very much, but it certainly also provides a pretty strong incentive to play nicey-nice.

When viewed through this lens, the move to sell from those stockpiles looks ingenious. It supports an economic recovery in America, while simultaneously providing for more revenues without increasing taxes in the budgetary cycle. It supports America’s credit rating by taking the credit limit debate off the table, while at the same time sticking it to Russia for their efforts to undermine America’s dominance in foreign affairs. Meanwhile it sends a message to other recalcitrant governments that America may talk more softly these days, but we still swing a mighty big stick – even when we’re not actively engaged militarily.

Not very strategic? I answer that, if this is not the purpose of the Strategic Petroleum Reserve, what is???

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