Arnold Kling  

Strategic Petroleum Reserve

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With oil prices high, should the Strategic Petroleum Reserve be reduced? Steve Antler criticizes John Kerry for making such a suggestion.

In contrast, Fred Singer has called the Strategic Petroleum Reserve,


a wasteful effort by government to protect against an imaginary embargo. No such thing: Being fungible, SPR oil would merely lower slightly the price of oil to consumers around the world.

What Singer is saying is that oil is oil (see Oil Econ 101.) If, say, the Saudis stop selling us oil, we would just replace their oil with Venezuelan oil. Conversely, if we start selling oil from the SPR, that oil just glows into the market. It does not specifically replace Saudi oil.

So, Singer argues, why not just get rid of the SPR? He would sell off the SPR when oil prices are high. He also would sell it off when oil prices are low.

For Discussion. Is there an effective comeback to Singer's point that oil is oil, so that there really is nothing strategic about the SPR?


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The author at BOPnews in a related article titled OPEC Votes Production Cut. writes:
    The pink broadsheet, FT gives us the run down on the oil run around: Michael Rothman, analyst at Merrill Lynch, said Opec was only partly responsible for the rise in oil prices, which on Tuesday was trading up 85 cents at... [Tracked on March 31, 2004 10:54 AM]
COMMENTS (12 to date)
Mcwop writes:

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.

Boonton writes:

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.

Scott Wood writes:

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".

Chris writes:

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.

David Thomson writes:

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.

David Thomson writes:

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.

Lawrance George Lux writes:

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

Thorley Winston writes:

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.

Boonton writes:

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.

prag writes:

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...

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