Last Updated: Sun Jul 31, 2011 14:40 pm (KSA) 11:40 am (GMT)

US debt vote scares oil markets as D-Day approaches. Analysis by Mary E. Stonaker

Subsidies were removed from certain renewable industries while the Strategic Petroleum Reserve (SPR) was partially released in efforts to ease the upward pressure on oil prices. (File Photo)
Subsidies were removed from certain renewable industries while the Strategic Petroleum Reserve (SPR) was partially released in efforts to ease the upward pressure on oil prices. (File Photo)

The Congress is getting down to the wire on a vote that could determine the future of many markets and many livelihoods. Debating whether to raise the debt ceiling, alter government spending and associated decisions caused oil markets to increase to $118 per barrel on Friday.

At the same time, Europe is also dealing with debt crises and the markets have reflected that.

Subsidies and taxes provide methods for governments around the world to control the type and quantity of energy its population consumes.

Recent efforts by the Obama administration to ease fuel dependency have been contradictory. Subsidies were removed from certain renewable industries while the Strategic Petroleum Reserve (SPR) was partially released in efforts to ease the upward pressure on oil prices.

That pressure originated from the threat to oil supply following the beginning of the “Arab Spring” in early 2011 with the removal of Libyan oil posed the greatest energy security threat to Europe. However, the unstable Egypt, Yemen and Somalia realities lent credible risk to one of the most important shipping lanes in the world, the Red Sea.

Nonetheless, the true importance of the Suez Canal has been decreased since the interruptions to nearly 10 percent of the world’s shipments in 1956 and 1967-1975, according to the International Energy Agency (IEA).

Since then the introduction of massive oil tankers, known as Very Large Crude Carriers (VLCCs) has made it competitively viable to sail around the Cape of Good Hope, decreasing Suez oil traffic from 10 percent to about 1 percent today, and with it the associated risk.

While both sides are arguing on behalf of their constituents Saturday in a special session, concessions will be needed to pass a deal before the August 2nd deadline.

During these proceedings on Saturday, Senate Minority Leader Mitch McConnell, Republican of Kentucky commented to reporters that an “agreement within the very near future” is viable and that a national default “is not going to happen.”

Democrats however, are not conceding to the idea of another stopgap, short-term measure as Republicans are proposing. A vote doing just that in November 2010 is why Americans are facing this problem today.

Despite the outcome, it is first important that a long-term solution be agreed upon, regardless of its stipulations. A congressional committee is an excellent idea. Just like any individual or corporation undergoing debt counseling, the federal government will have to make spending cuts. Lobbies on Capitol Hill will work hard to ensure their particular contracts are not cut but reality must be addressed if the US will remain deserving of their AAA credit rating.

Energy subsidies should be examined closely, as they have been, to encourage growth of renewable energies while also keeping a balanced budget.

The SPR should not be released again unless true emergency falls upon the United States. While technical reasons (leaking of the reserves) may have contributed to the decision earlier this year, the reserves will become even more valuable if the Treasury defaults and the dollar’s value depreciates.

(Mary E Stonaker is an independent scholar, most recently with the Middle East Institute, National University of Singapore. She can be contacted at marystonaker@gmail.com)

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