Sometime before the end of May, the 500 millionth barrel of crude oil will be pumped into Louisiana and Texas salt domes as part of the nation's Strategic Petroleum Reserve. The United States thus far has spent more than $16 billion to create the reserve and reduce American vulnerability to an interruption of oil imports.
At half a billion barrels, the Strategic Petroleum Reserve, or SPR, represents nearly four months worth of net oil imports at their recent level of about 4.4 million barrels a day. And because no one expects that imports would cease entirely even with, say, a series of revolutions in major Middle Eastern oil-exporting nations, the SPR likely would provide help for several months more.
The Reagan administration is comfortable with the size of the SPR, and when current contracts to buy oil expire later this year -- for a total of about 505 million barrels -- it plans no more purchases. Some energy experts, including some in the administration, believe the SPR should be filled until the original target of 750 million barrels is reached. With 42 gallons in a barrel, that would be 31.5 billion gallons of crude oil.
But neither the present 500 million barrels nor a possible 750 million barrels in the SPR would make the country secure from the vagaries of the world of oil.
A strategic reserve can help deal with a relatively-short-term disruption in world supplies, such as the Arab embargo of 1973, imposed for political reasons. However, an SPR can do little to shield the United States or other importing nations from the economic effects of long-term cartel-like behavior by the Organization of Petroleum Exporting Countries.
The plunge in world oil prices in recent months, which energy analysts unanimously agree will reduce high-cost oil production and increase oil demand, raises this question of economic vulnerability once more.
The price drop has generated new pleas of price protection for domestic oil producers, not to keep them from going bankrupt or to improve their profits, but to enhance national security. Some members of Congress are urging a direct subsidy for so-called stripper wells that produce 10 barrels of oil or less a day. Others have called for an oil import fee that would provide a price umbrella similar to that of the oil import quota system.
Vice President George Bush has taken a different, highly publicized tack by suggesting that Saudi Arabia should reduce its oil production to raise world oil prices once more and minimize damage to the American oil industry. U.S. national security requires a viable domestic oil industry, he argues.
As sharply lower oil prices spur demand and reduce production, oil imports are expected to grow. That increases U.S. vulnerability to a potential short-term supply disruption, because any given level of oil in the SPR will represent less of a cushion, given the higher level of imports.
Meanwhile, both the drop in current cash flow and prospective future prices have caused the oil industry to impose severe cutbacks in its exploration and production spending. Industry officials say the longer prices stay down, the more production will fall during the early part of the next decade.
The impact will be that long in coming, because it usually takes about five years to move from initial exploration efforts to bringing a new field into production. More immediate cuts in production will occur where the current cash cost of production is higher than the oil's selling price -- as is the case in a substantial number of stripper wells.
But lower oil prices also mean lower costs for businesses and households that use oil products. For the former, lower oil costs can mean higher profits; for the latter, more money available to spend on other things.
The public-policy issue is how best to balance the short-term costs to the economy from boosting oil prices again -- however that might be accomplished -- against presumed long-term gains from keeping oil imports lower than they otherwise would be. Figuring out either the short-term costs from such a policy or the long-term gains is an exceedingly difficult proposition.
So far, the drop in oil prices apparently has had an overall negative impact on the economy, in the opinion of many economic analysts. Oil companies have moved with surprising speed to slash their exploration and drilling activities and to trim their payrolls. Exxon, for instance, has announced plans to shed about 6,000 U.S. employes. The positive effects on the economy from the lower prices will begin to show up later in the year, the analysts say.
Action to raise oil prices could reverse some of the industry's cutbacks, but only at the cost of reducing those broader favorable economic effects later on. However, such a reversal could help the industry keep on tap the valuable expertise of the employes who otherwise are going to be let go, and it also could stave off scrapping some of the capital equipment, such as drill rigs, industry officials argue.
The main point is that keeping exploration activities at a higher level than is now in prospect would mean more production in the 1990s.
Another argument made by some energy economists for action to increase prices, perhaps through a tariff, is that a lower level of U.S. oil imports likely would mean a lower level of world oil prices than would otherwise be the case. Thus, according to this argument, a tariff would improve U.S. economic welfare by lowering the price OPEC could charge for its oil. Prices in the United States would be higher than the OPEC price, but part of the difference would be captured by the tariff and the remainder could be captured through some type of excise tax on domestically produced crude or on products such as gasoline.
Under current circumstances there are at least two problems with this argument. The amount of unused production capacity in OPEC nations is so large that removing a small increment of world demand probably would have little impact on the price. Many of the current proposals for a price umbrella would have a sufficiently small impact on prices that they would change the long-term level of oil imports only very modestly, according to one administration analyst.
Yet imposing a tariff that was large enough to make a major difference in U.S. oil imports would have such high short-term economic costs that it probably would be a political impossibility. In addition, any large tariff or similar price-related action could find its effects vitiated by a host of exceptions and income-redistribution provisions. After all, that was what happened under the last government program that directly limited oil imports in the name of national security.
When the Arab oil embargo and its after-shock hit in 1973, the United States had been limiting oil imports for 14 years. The point of that Mandatory Oil Import Program, and a "voluntary" plan that had preceded it earlier in the 1950s, was to cap the use of cheap foreign oil and thus boost the price of American oil.
In that sense, import quotas worked. A Nixon administration task force headed by George P. Shultz, who was secretary of Labor then and who now is secretary of State, concluded in 1970 that the quota system had raised crude-oil prices in this country sufficiently to cost U.S. oil users extra billions of dollars a year.
But the higher prices clearly had not significantly limited American vulnerability to an actual or threatened interruption of oil imports.
By 1971, after two decades of such price protection, oil-drilling efforts had tailed off in the United States and there was an acute shortage of refinery capacity. There was also a severe shortage of natural gas, whose price had been rigidly controlled since 1954.
The Mandatory Oil Import Program ended up with specific Western Hemisphere exemptions for oil from Venezuela, Mexico and Canada. Heavy fuel oil for industrial boilers was exempt from quotas to hold down energy costs in the energy-short northeastern states. There was also special treatment for small refiners, inland refiners, petrochemical companies and others.
The Western Hemisphere exemption was justified on the grounds that the national security goal was to ensure continuity of oil supplies. With U.S. military might close at hand to protect sources close to home, they were judged secure, and therefore no risk was involved if they were not limited.
But if the national security risk associated with oil imports is more apt to be economic than political, then such exemptions would not make sense. One problem with the current debate over oil and national security is that the debaters often don't specify what kind of risk they expect their proposal to reduce or eliminate.
One conclusion that emerged from the energy policy struggles of the 1970s was that the United States simply could not afford to try to become genuinely energy independent. Except for some limited natural gas imports from Mexico and Canada, and a growing volume of hydroelectric power from the latter, being dependent on the rest of the world for part of the nation's energy means living with some level of oil imports.
For a given level of economic activity, that level is now -- and will continue for many years to be -- lower than it would have been had prices not shot up during the 1970s and stayed as high as they did for several years. Back in 1973, the United States consumed about 17.3 million barrels of petroleum products each day. In 1985, with an economy 30 percent larger, it used 15.7 million barrels a day.
In other words, in the United States today, oil is 40 percent less important per dollar of economic output than it was in 1973. Efficiency gains have been dramatic, too, in most other major oil-importing nations.
Thus, the economic damage that would be likely to flow from a future oil-supply disruption, or from reestablishment of effective OPEC control of prices, is far less now than it was a decade or so ago. And that means that the current costs that can be justified to reduce U.S. vulnerability are also much lower than they were then.