What should the federal government of the United States of America do when things get a little tight? I guess they could reduce overall spending. That’s what many Americans have done as a result of uncertain and challenging times. Belt tightening has been the ‘go to’ in tough times since belts were invented.
Since the Fed’s budget is so massive and diversified another reasonable option would be to keep spending the same amount but move things around to get more for our money. The Fed can re-organize, re-level, eliminate duplicate efforts, as well as end antiquated programs that have no useful purpose anymore. Yep, the Fed can do what us Americans have been doing most of a decade now and tighten up or the Fed can go to the pawn shop!
Yes indeed, instead of showing some restraint in spending the braini-acks in Washington are deciding to sell off some (about 8%) of our Strategic Petroleum Reserve (SPR) to raise cash as a part of a budget deal. To cement the appearance of no self control whatsoever, the federal debt ceiling in the same bill will be raised as well. Everyone is looking a little silly on this one as the sale has support on both sides of the aisle as well as from the Whitehouse. There is also potential of the selling off of an additional $2 billion dollars worth to update the SPR. Maybe some new curtains, landscaping, and some lighting improvements are in the plans. Crown molding would be nice.
There have been sales from the SPR before. In 1991 the SPR helped pay for the Gulf War. In 1996 and 1997 some reserves were sold off to reduce the federal debt. In 2005 the SPR was used to make up for oil production losses as a result of hurricane Katrina and 2011 for oil production interruptions due to the war in Libya. What is the purpose of our American resource pawning this time? Nothing really… we’re just going to throw the money in our checking account. Yeah, really.
So let us digest this grand plan and apply this bit financial wizardry to our own personal economies. If I and my family were spending more than we earned, had maxed out our credit cards and home equity line, and we could not continue to buy all the things we wanted, our next ‘go to’ is get an additional credit card and pawn our stuff so we can keep on buying all of the things? Really? Are you kidding? Children and Family Services would take our kids away if we did that. My 3rd grade math teacher (Ms. Just) would deny ever teaching the third grade. Not only are we selling our stuff, but we will be selling at a time (2018-2025) that prices will still likely have plenty of downward pressure.
Here is how the math may look on this magic. The average cost for a barrel of crude oil in the reserve is $29.70USD. The average price of a barrel of oil today is about $45.00USD. Makes sense until you adjust the cost per barrel for inflation and other costs… now we have a cost per barrel of $74.00USD per barrel for reserve crude. If crude oil cost stays in the $50.00USD range we will only be underwater $24.00USD for each barrel of oil we sell. Wow, these people are so smart they make me tingle with admiration; like rock stars they are.
It could be argued in this modern world oil reserves are not as important to protect us from supply instability as the SPR was intended when created. Although as of July2015 the United States was still importing 9.5 million barrels of oil per day and we did tap into the reserve as recently as 2011. It should also be noted that other world powers are doing the exact opposite and have or are building oil reserves. China and India are stocking up and Germany, Japan, South Korea, France, Spain, Italy and other oil importing nations all have reserves. I am sure the brain trust in Washington could explain to me why this makes sense. But somehow it seems it would be like one of those conversations you have with one of your dumber friends. You know, the one who tries to convince you it’s actually safer to not wear seatbelts while driving a car and too not wear motorcycle helmets.
The government taping into the crude oil reserve speaks louder than just selling crude oil. It tells the whole world that our leaders think using the SPR as a ‘piggy bank’ is okay and the new normal. The act of selling the crude is only a symptom of the more dangerous mindset. It reminds me of all the purposeless home equity loans people were taking out in the early 2000’s. People were borrowing on their home for things like vacations, sport recreational vehicles, and to puff up their checking account to live large. The feeling that there was so much value built into their homes made them feel that borrowing against the home’s value was not a risk and was safer than waiting or sacrificing to buy things. It was the labor free easy way to what we wanted. As a nation we all know better now and would never do that again…or would we?