Economist Caution on Oil Reserves The Associated Press, Fri 22 Sep 2000

To politicians who favor uncorking the nation's oil reserves to cut spiraling prices, economists offer this caution: When government tinkers with supply and demand, the best of intentions don't always go as planned.

Take the years when U.S. and European governments so busied themselves buying up wheat, meat and other farm products in a bid to steady prices that some European ports harbored boats loaded full of frozen chicken with no where to go.

There was also the federal government's longtime policy of capping domestic oil and natural gas prices to protect consumers. Instead, all it did was hold prices so low that producers bagged drilling, supply dropped and overall prices went up.

So while many economists say they can see the political value of proposals to tap America's stockpiled oil, they're none too confident the experiment will do anything to significantly dent prices and help consumers.

The proof, they say, of how even the best economic intentions go awry are in policy-makers' own past experiments.

``Past government efforts to influence the price of oil and control the price of oil have just lead to tremendous distortions. It hasn't been very successful,'' said George David Smith, an economic historian at New York University's Stern School of Business.

``The oil market is not guided by some invisible hand. The oil market is subject to all kinds of strategic pressures,'' Smith said.

Those pressures are beyond the federal government's ability to predict or control. That dooms any opening of the oil reserve to  if not necessarily failure  having a minimal impact on prices for gasoline and heating fuel, economists say.

``If the purpose of the strategic petroleum reserve is to have petroleum set aside in case of emergencies ... that might make sense,'' said Robert Burns, a specialist in energy at Ohio State University's National Regulatory Research Center.

``But if it's to actually try and influence the market it won't have much of an effect and it tends not to work as well as people hope,'' he said.

Burns and others say despite the political hay to be made, the value of opening the reserves will be tempered by several factors. For one, they say, the 570 million barrel reserve is nothing compared to the resources of OPEC and nobody knows how the oil cartel will respond to government action.

In addition, Vice President Al Gore is proposing ``test sales'' of just 5 million barrels at a time. Such a small amount  enough to satisfy U.S. demand for eight hours  would have a negligible effect on prices, economists say.

There's also the questions of how quickly that oil could be moved out of storage and to refineries, to make it usable, or how much refinery and pipeline capacity is even available, doubts that would shatter many economic models.

One frequently cited pattern of government folly in influencing prices is the United States' history of buying stockpiles of farm products to raise prices for farmers, with the plan to sell them when prices rose. European governments engaged in similar policies.

The problems came when the governments  reluctant to anger their farmers  avoided selling the products domestically and ended up competing to unload their stockpiles on the world market, undercutting the prices of one another again and again.

``By letting politics into it, we ruined the program,'' says Dermot Hayes, a professor specializing in agricultural economics at Iowa State University.

Hayes' colleagues also point to the federal caps on domestic gas prices and the Nixon administration's efforts to impose broad price caps on most of the economy. All those efforts have since been abandoned, having proved futile or counterproductive, they said.

Not all economists are so critical of the plan to open the oil reserve. Geoff Heal, a professor of economics and finance at Columbia University, argues it's costly to keep such stockpiles. Given that the United States hasn't faced a true energy crisis for years, this is a chance to use it for something, he said.

Such an effort, if waged in a determined manner, could cut oil prices by about 15 cents a gallon in the short-term, Heal said. But Heal and others say the better solution might be to stand aside and let the market forces work on their own.

``It's too soon to say there's a real crisis here in economic terms, but it's not too soon to say there's a political problem,'' Smith said. ``I think a real fine statesman will have the courage to wait a while.''

http://www.oilnews.com/?action=display&article=3642843&template=oil/index.txt&index=recent

-- Martin Thompson (mthom1927@aol.com), September 22, 2000

Answers

Well, I see the government tinkering--and resulting market distrtions--are about to begin, with Clinton's authorized release of 30 million barrels of oil from the SPR.

-- JackW (jpayne@webtv.net), September 22, 2000.

Big deal. Clinton is releasing enough oil to power the U.S. for two days. Whoop-de-do!

-- Wellesley (wellesley@freeport.net), September 22, 2000.

It will work, though. It will temporarily drive down oil prices, and guarantee Al Gore's election as the next president of the United States. That's all this political ploy is about -- just to get through the election.

-- RogerT (rogerT@c-zone.net), September 22, 2000.

People are so easily fooled though....it's the logical thing for a political master, like Clinton, to do.

He's fooled us all so many times before....why shouldn't he try it again?

-- R2D2 (r2d2@earthend.net), September 22, 2000.