Strategic Petroleum Reserve

The SPR might come in handy if terrorists bomb several major pipelines (Venezuala, Russia) all at once, thus disrupting production. I think there is a need to be prepared for the unexpected these days.

What if the Saudi's boycott selling any oil to anyone? What if they require customers to pledge not to sell oil to the US or Israel & back that up by restricting how much oil their customers can purchase?

Oil, unfortunately, is not in the hands of a 'free market' but of different groups vying for extra-market political dominance. While minor in the big scheme of things, the SPR provides for a pressure release tool to mischief in the oil market.

Surely refusing to sell any oil to anyone would be the textbook example of cutting off one's nose to spite one's face. Refusing to sell to anyone who sells to the US, even if it was technically possible, would still result in the US buying oil from all of the other oil producing nations, and the Saudi's selling to only their list of acceptable people. That's fungibility.

The SPR should be used to blunt short term spikes caused by temporarily market illiquidity. There are numerous such mechanisms to buffer shocks. Liquidating it on balance when prices are high is a good idea, as is replacing when prices are low, just as with any reserve.

However, an examination of the pattern of oil price since 1999 indicates that this is not a shock caused by a temporary market imbalance, but the result of an inflationary policy on the part of the Fed. Selling from the oil reserve would blut prices for a short period of time, which would then resume their upward march. If part of some plan to increase conservation - and simply buffer the economy short term while that program were being put in place, this might make some sense.

Absent that - see "Good money after Bad".

The one contingency I can see would be a major war that would make shipping oil rather hazardous. Apart from that it's a boondoggle.

Depends on what credibility is worth in this market. I don't think I've seen anyone do the numbers on the marginal cost of it versus the utility of having a threat.

ible mistake to think that Economics 101 is the only factor to be considered. If it was, then most certainly we would not require oil reserves. We could easily find another supplier. Unfortunately, we must consider the possibility of terrorism. In many respects, we are indirectly telling the terrorists that it will do them little good to disrupt our fuel supplies.

Let's try this again:

It is a terrible mistake to think that Economics 101 is the only factor to be considered. If it was, then most certainly we would not require oil reserves. We could easily find another supplier. Unfortunately, we must consider the possibility of terrorism. In many respects, we are indirectly telling the terrorists that it will do them little good to disrupt our fuel supplies.

The Reserve can do little to tone down the Oil price increases, but does serve other purposes. International traders are attempting to transfer to Railroads for freight haulage, and it is showing the serious lack of investment in the Rail lines. Reserve holdings can insure We do not have to relie on Rail, in the advent of the cutoff of Oil imports. This is serious in itself, with knowledge that freight haulage would triple on the Rail lines, if truck lines went down. lgl

I always thought that the Strategic Patroleum Reserve was meant to be an emergency fuel supply for the military if we ever found ourselves in a situation in which our oil supply was cut off during an attack.

No it was just meant to be an emergancy supply of oil. If it was entirely for military use it would make much more sense to stockpile refined aviation fuel and diesal fuel rather than crude oil that would have to be refined during a military emergancy.

I guess it depends upon what is meant by strategic?

What problem are we trying to solve for here?

I always understood the SPR to be a reserve as kind of an insurance policy for supply disruption. Much like safety stock of a manufacturer, if there is a shock to supply, the inventory can be used to keep the shock from propagating exponentially downstream.

Price changes can be viewed as a shock, but I think of the SPR not as a mechanism to mitigate price shocks, but to guard against a boundary event - a shock where ex-US supply goes to zero.

Certainly oil is oil, and there is an argument that diversified sources of oil mean that the risk of a total supply halt is unlikely, it doesn't mean it's impossible.

If the SPR is a bad idea, then so is life insurance.

Remember risk aversion is not linear...