SPR Might Be Key to Cheaper Gas

This is a partial transcript of "Special Report with Brit Hume", May 18, 2004 that has been edited for clarity.

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(BEGIN VIDEO CLIP)

SEN. CHARLES SCHUMER (D), NEW YORK: Our resolution calls on the administration to release one million barrels of oil a day for 30 days, with an option to extend it for an additional 30 days.

SEN. BILL FRIST (R-TN), MAJORITY LEADER: Should we continue to fill it? I believe we should continue to fill it. It's a national -- national security facility. We're at war. We're at war.

(END VIDEO CLIP)

BRIT HUME, HOST: Those two senators are talking about the Strategic Petroleum Reserve (search), which has been in the process of being filled by a series of administrations, to guard against a major disruption of U.S. fuel supplies.

Not merely, it seems, a boost in fuel prices. Fuel prices tend to go up every spring. Then settle down. However, few analysts expect that to happen this year. They are higher up than usual, and there's no sign of a drop-off. So what's going on?

For answers, we turn to Jerry Taylor, director of Natural Resources Studies at the Cato Institute here in Washington.

Jerry, first a look at -- comparison sake, fuel prices. National average today, it's approximately $1.93 for a gallon of regular. Unleaded, a month ago, as you can you see, $1.77. And a year ago, when we were having the usual slight boost anyway, $1.50. Nobody thinks they're coming down. Why not?

JERRY TAYLOR, NATURAL RESOURCES STUDIES DIRECTOR, CATO INSTITUTE: Well, about half the reason for that price increase over the last year has to do with the high price of world crude oil. I mean with you need oil to make gasoline, and oil prices have gone up quite a bit.

HUME: And now what? They've gone up because OPEC (search) has been restraining production, particularly?

TAYLOR: Not at all. OPEC has announced their intention cut back production but they haven't done that. OPEC production today is higher than it was last year, higher than it was six months ago. Non-OPEC production is up.

What's going on is that economic demand is driving this market, mostly the demand in China. The world oil market has been increasing production. Just demand has been going a lot quicker, and it's going to take some time before the market catches up.

HUME: Now, one of the things that usually affects field supplies is the change of season. Spring to summer.

TAYLOR: Right.

HUME: Or winter to spring is that we have all these different fuel formulas that are required by different environmental standards around the country. Is that a factor this year or not?

TAYLOR: That's certainly playing a role. The price of world crude is explains only about half of the price increase we've seen. The other half...

HUME: The cost of crude oil itself is about half of what's going on.

TAYLOR: It's about half of what's going on. The other half has to do with the fact that supplies are just tight right now. There is this bump up in price. It always occurs this time of year, when we start making summertime gasoline, which is environmentally friendly, but it's also a bit more expensive to produce. So you have this temporary price blow-up.

The other thing that's going on is there's a new law in affect, which requires refineries to take sulfur -- most of the sulfur out of gasoline. It used to be loaded up with sulfur; this is an environmental initiative. But it requires hundreds of millions of dollars to retool these refineries to get that sulfur out. And that's hundreds of millions of dollars that each refinery can't spend on say new capacity, new production.

And so it's a one-time event once the refineries retool, things can go on like before, but they can't use the money to increase production.

HUME: So all other things being equal, next year when that job is done, prices should be somewhat lower than they are now.

TAYLOR: Well, they get tighter. I mean this is a phased-in investment requirement by the federal government. Some refineries are making the investment. And that's taking away money they could spend on increasing production. Some refineries are actually shutting down because they're not profitable enough to withstand a couple of hundred million more dollars of capital.

HUME: Is our refinery capacity what it was a year ago?

TAYLOR: Yes, actually it is. Though we haven't built any new refineries in the United States since 1976, what the industry has done is increase the capacity in existing refineries. And so capacity has actually increased along with demands for the past 30 years.

HUME: So refinery capacity, except for this wrinkle you're talking about, is not the key player.

TAYLOR: It's not the key player. And plus, have you to look at global refining capacity because this is now a global market for gasoline. It didn't use to be but now they ship gasoline across oceans to whatever -- wherever the demand is greatest. And China is sucking up a lot of gasoline on the world market.

HUME: Do we use in this country imported finished product, or just imported crude?

TAYLOR: We do. We primarily use imported crude. But we also use imported finished product. And in fact, 30 percent of the New York and Connecticut market is made up of gasoline imported from Europe.

HUME: Now, which would mean now we do not have enough refinery capacity to meet our own needs.

TAYLOR: Well, it means it's cheaper to buy it from abroad. It doesn't necessarily mean we don't have enough capacity here to meet our own needs. In that it's a global market like any other, and you can buy -- you can buy gasoline from abroad, you can make it here at home. But as I say capacity in the United States has increased 30 percent -- or production of gasoline in the United States has increased 30 percent since '76, which is a pretty reasonable clip.

HUME: Now, let's talk about the Strategic Petroleum Reserve, which is oil stored underground in Louisiana. How much is it supposed to be before it's finished?

TAYLOR: Well, the idea was to put a billion barrels in there. Right now, we have 650 million barrels.

HUME: Six hundred and fifty million barrels are in there. And how much goes in there every day?

TAYLOR: It's hard -- it depends on the administration. They make decisions based on...

HUME: Well, roughly...

TAYLOR: ... roughly whim. I'm not entirely sure what the numbers are right now.

HUME: My understanding would be that it was about what? Two million barrels a day or something like that. Does that make sense?

TAYLOR: I don't think the purchases are that high right now, but they're incrementally been building up for the last several years now.

HUME: All right. Now, what has been the experience when the Strategic Petroleum Reserve has been used to ameliorate fuel prices in the past?

TAYLOR: It's only been used a couple of times, most recently in 2000 by President Clinton. He allowed companies to borrow oil from the reserve with promised to pay that oil back, either in kind or in price somewhere down the road to alleviate the price spike that we saw in 2000.

That reduced price nearly overnight, from about $37 a barrel down to about $31 a barrel. So it had a very quick impact, but then prices started creeping back up again in short order. And so there's some debate about how much that relief did for the world market.

HUME: Because it had to be made up.

TAYLOR: Right. But the fact is releasing a million barrels a day, which is what that capa -- what we could do with the SPR, is a significant player in the world market. All of the things being equal, a release of about a million barrels a day would drive prices of gasoline down about a dime a gallon below where they otherwise would have been.

HUME: So you're for doing?

TAYLOR: I think so. I think the idea that we need to hold back this oil in case of a catastrophic supply disruption misunderstands how world oil markets work. An embargo is impossible to execute because once an oil producer sends oil out of its port, it can't control what happens to it. So embargos are symbolic gestures.

In '73, all that happened during that embargo is instead of buying oil from OPEC, we bought oil from people who bought oil from OPEC. Well, we just bought from non-OPEC producers who used to sell to somebody else.

If there were a catastrophic supply disruption, that would be another thing. But no matter how anti-American regimes are, like the Ayatollah Khomeini, they still want to sell oil. It's their only source of revenue.

HUME: Jerry Taylor, glad to have you.

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