There are few policy options that will reduce gasoline prices in the short run, and it is very difficult to promptly and significantly reduce demand enough to have a significant effect on prices. Many drivers assumed that gas prices would remain low when they made choices about where to live, the distance to work or school, and vehicle efficiency. Drivers have been unable to immediately adjust to high gasoline prices, which have increased by 37 percent this year. Consequently, gasoline consumption has declined by only 2 percent this year.
Without decreasing demand, the only other option to address high prices is to increase the supply of oil. This, too, is difficult to accomplish. Most OPEC nations are running at full capacity. It took months of begging by President Bush and Vice President Cheney to convince Saudi Arabia to increase its production, which was up by 390,000 barrels per day between April and June—an increase of only 4 percent.
Yet one proven way to quickly increase supplies and decrease prices is to release a small amount of oil from the 98 percent full Strategic Petroleum Reserve. The U.S. Strategic Petroleum Reserve was created in 1975 in the wake of the 1973 OPEC oil embargo to help the United States buffer against oil price shocks that have a “major adverse impact on national safety or the national economy.”
President George H. W. Bush dipped into the Reserve to stabilize prices during the run-up to Operation Desert Storm in 1991, and President George W. Bush did so again in the wake of Hurricane Katrina. The oil sold from the reserve in both cases helped stabilize oil markets and lower gas prices.
Release has saved families money
An analysis of price data shows that in the 100 days after each release, American families enjoyed significant savings on their gasoline bills.
These savings amounted to $65 per household after the 1991 Desert Storm release, and $125 per household after the Hurricane Katrina release, in 2008 dollars. These results are illustrative, not predictive of any future release. Clearly many other factors intervened that may have caused changes in gasoline and oil prices in the winter of 1991 and the fall of 2005, but the release of a relatively modest amount of oil from the SPR contributed in large part to the drop in oil prices, the moderation of gasoline prices, and the savings that American families enjoyed.
Operation Desert Storm
On January 16, 1991, President George H.W. Bush announced the release of 34 million barrels of oil to stabilize prices during Operation Desert Storm. That day, oil sold for $32.25 a barrel. The day after the announcement, prices dropped 33.4 percent, one of the largest one-day drops in the history of recorded oil prices, to $21.48/barrel. Prices stayed low in conjunction with the release of oil reserves in nations across the Organisation for Economic Co-operation and Development, averaging $19.46/barrel in February and $15.50/barrel in March.
The effect on gasoline prices was similar. While day-by-day data is unavailable, weekly averages show that regular gasoline prices across the country were approximately $1.27/gallon on the day of the announcement, but dropped to an average $1.11 in February, and $1.04 in March. These lower prices brought considerable savings to U.S. households. Over the 100 days post sale announcement, American families saved an average of $60 compared with what they would have spent had gasoline prices stayed at $1.27/gallon.
Oil and gas prices were rising as Hurricane Katrina bore down onto the Gulf Coast in late August 2005. By September 1, after the storm made landfall and wrecked key oil infrastructure in the gulf, prices had risen to $69.50/barrel, compared to the August average of $65.58/barrel. Gasoline prices averaged $2.45/gallon in August, but had leapt to $3.03/gallon by September 2, the day of the announcement.
President George W. Bush authorized the release of 30 million barrels of crude oil from the reserves on September 2nd. The price of oil dropped 3.7 percent that day, and stayed low throughout the aftermath of the storm, averaging $62.26 in October and $58.32 in November. Gasoline prices were down as well, averaging $2.86 for a gallon of regular in September and $2.68 in October.
The savings from these lower prices allowed households to spend $125 less on gasoline in the 100 days after the announcement than they would have had gas prices stayed at an average of $3.03 per gallon.
House majority supports oil release
The House of Representatives voted on the Consumer Energy Supply Act, H.R. 6578 on July 24th of this year. The bill, authored by Reps. Nick Lampson (D-TX), Ed Markey (D-MA), and John Barrow (D-GA), would have put up to 70 million barrels of sweet crude oil from the SPR in the market, with oil companies replenishing the Reserve over time with heavy crude oil. The bill was supported by an overwhelming majority—268-157—yet it failed because it was offered on the suspension calendar, which meant that it required a two-thirds majority. Based on past experience, this proposal would have promptly reduced oil and gasoline prices had it become law.
President Bush could act at any time to release oil from our stockpile to increase supply and reduce prices, but he refuses. He has not tried to lower the record oil prices that have led to record oil company profits. In September, Congress may vote on proposals to sell a small amount of oil from the Reserve to promptly lower oil and gasoline prices. History suggests that this would provide prompt relief for American families, who are struggling with high fuel, food, and other prices.
Gasoline price data is based on the weekly price records of a gallon of regular gas from the Energy Information Administration. Weekly prices are assumed to represent the midpoint of a seven-day period.
Because of an absence of weekly data from Dec 3, 1990 to January 19, 1991, gasoline prices in that gap are estimated to be the average of these two available data points. Barrel oil price changes over the same period suggest that this is an appropriate estimation.
Household gasoline consumption is calculated from the Consumer Expenditure Survey and adjusted for price changes based on short-term demand elasticity for gasoline of .11 as estimated by Gilbert Metcalf of the Brookings Institution.
Household savings are in 2008 dollars, adjusted based on CPI figures from the Bureau of Labor Statistics.