Congress Plans to Sell Off America's Oil Reserve ... And It's a Huge Mistake

Like many Americans, I’m pretty jaded when it comes to Washington. So it takes a lot to surprise me.

But this did the trick.

Short on cash and evidently good financial sense, too, Congress has latched onto a bipartisan plan by Sens. Mitch McConnell (R-Ky.) and Barbara Boxer (D-Cali.) to sell off portions of the Strategic Petroleum Reserve as a means of helping pay for a $47.1 billion shortage in an estimated $100 billion highway bill.

The reason this is such a big deal is that the Strategic Petroleum Reserve, or “SPR” for short, was created in 1975 as an emergency stockpile to insulate the country against supply shocks. That means it’s a national defense asset, not a source of free cash or an ATM.

[sharequote align="center"]It’s a national defense asset, not a source of free cash or an ATM.[/sharequote]

Naturally, the government and its bean counters don’t think so. To them, this cockamamie plan is a success because they’re going to “offset” money needed without increasing the deficit or raising taxes. That’s government-speak for “spending cash they don’t have.”

They claim the average cost per barrel is only $29.70, which implies that selling them will be profitable at today’s prices. However, factor in inflation and foregone royalties and the cost is at least $74 a barrel, according to ClearView Energy Partners.

I think it’s more like $90 to $100 a barrel when you consider what it would cost to operate the reserves like any for-profit corporation would.

This is one of the dumbest things I’ve ever seen our government do. You might as well sell the insurance on your house to repave your driveway, to paraphrase Sen. Lisa Murkowski (R-Ark.).

Water gushes out of a drilling pipe as it is pulled up to be replaced with a fresh pipe at a hydraulic fracturing site in Midland, Texas, Sept. 24, 2013. The drilling method known as fracking uses huge amounts of high-pressure, chemical-laced water to free oil and natural gas trapped deep in underground rocks. (AP/Pat Sullivan)

What gets my attention here is twofold.

First, our government has a well-documented history of backing the wrong priorities. From corn-based ethanol to social security, it’s one mistake after another that reinforces 50 years of bad fiscal decision making.

In this case, Congress is making a bet that oil prices will be at least $75 by 2018 and $96 a barrel in 2025. Oil futures traders priced oil for delivery in 2020 at $63 as of July 29, according to Bloomberg. Prices for immediate delivery are $8 lower now than they were at the start of 2015.

My point is that this is hardly a great time to sell oil. The black gold has fallen by more than half since October 2014 and isn’t set to rise any time soon.

If anything, the government should be taking advantage of low prices to boost inventory, just as China is doing as part of a plan to boost that country’s reserves from 300 million barrels to 600 million barrels.

Setting the Record Straight on the Global Energy Equation

Like many individual investors in the stock market, Congress has never understood “buy low, sell high.” From $400 hammers to $640 toilet seats, they’ve always spent unbelievable amounts of money when they should have been saving it.

In this case, the fact that they’re willing to sell off part of our national strategic oil reserves at the worst possible moment and at a loss to boot is tantamount to believing the energy industry is going to cease to exist.

In fact, global energy consumption will rise by 25 to 35 percent by 2040 to accommodate upwards of 9 billion people versus only 7 billion now.

(Image via Franz Aberham/Getty Images)

People need energy and cannot live without it.

The energy bears are completely discounting the fact that there will be billions more consumers on the planet in the years ahead, and they’re going to drive oil for decades to come.

Were he alive today, I have no doubt that one of the greatest investors of all time would agree.

Sir John Templeton made billions by investing at times like these when everybody had reached what he called the “point of maximum pessimism.” That’s when unwarranted bearish sentiment drives down prices to the point where most investors become convinced a corporation, commodity, or even entire sector is next to worthless.

Conservation efforts are important, but they do not diminish overall demand, a point even the most resolute enviros begrudgingly acknowledge. Even the most aggressive scientists believe it will take 25 to 35 years to change over to alternative energy, so you still need oil.

Finally, global energy is directly correlated to the world’s rising standard of living. The Brookings Institution estimates that 4.7 billion of the total 9 billion people will be middle class by 2030, up from only 1.9 billion in 2010, so we’re talking about a huge consumption boom.

China and India will account for the lion’s share of this, but so will much of South America and even Africa, where human progress and wealth creation are a function of energy availability.

Simply put, there’s not a single oil executive worried about not being able to sell every last drop of oil they bring out of the ground for the simple reason that regional growth will also create regional pricing dynamics and shifting demand.

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