I summarize my thinking about the Strategic Petroleum Reserve in an essay.
I am not persuaded that the "convenience yield" of the SPR justifies its costs. However, even if it does, I believe it makes sense to have a rule that ties the amount of oil we hold in the SPR to the pattern of oil futures prices. In particular, we should keep less in the SPR when there is backwardation, and fill the SPR when oil futures prices show a pattern of expected increase. Filling the SPR during a period of backwardation, as we are doing now, serves to worsen what the market sees as a temporary price spike.
In contrast to governments, rational speculators buy low and sell high. This process stabilizes markets. Irrational speculators, who buy high and sell low, destabilize markets. That is the effect of the Strategic Petroleum Reserve -- as Karl Kraus once said of psychoanalysis, the SPR is the disease that it purports to cure.
the former oil man suggested an interesting scenario. Should the future price of oil drop below the spot price (they are nearly equal now), it would make sense to hold back purchases and lower the oil cost by using futures. He called this an oil hedge. Traders call this backwardization [sic]. It's a rare president who understands this level of detail.
Apparently, the President is thinking about backwardation, also. But I am not sure why he believes that spot and futures prices are close, unless he is looking only at short-term futures prices. Long-term futures prices are clearly below spot prices.
For Discussion. If there were no Strategic Petroleum Reserve, would private sector incentives be sufficient to provide enough oil storage in case of a disruption in supplies?