Tuesday, April 22, 2008

More on the SPR

A while back I had read a study that advocates getting rid of the SPR. The study was developed by the CATO institute (a think tank based in DC). The study suggests that we should abolish the SPR because of several reasons but here are the highlights:

1. The authors of the study estimate the oil price in the SPR to be around $65 - $80 (analysis in 2004) which was 3 times what the DOE estimates (around $30). They arrived at those numbers by taking into account inflation, in-kind contributions (instead of the royalties, the SPR gets oil directly from oil companies and thus the cost of acquiring the oil is taken off the books) and opportunity costs.

2. They argue that the SPR has only been tapped a few times (for reasons that Ben explained today) and the releases were too modest and too late (with the exception of Katrina).

3. They also argue that private stockpiles are not really suboptimal and even if they are the solution is not for the government to create its own stockpile but rather maybe subsidize private inventory holders. Some argue that private actors might hold back on releasing inventory to cause prices to rise even further but then again it’s not like the government has been releasing oil from the SPR left and right…

4. The SPR exists as an embargo hedge but as we all know there is no such thing as an embargo. Oil will always be available to whoever is willing to pay for it.

Based on the above, along with other considerations, the study recommends that the government sell the oil in the SPR and get out of the oil stockpiling business.

I’ve included a link to the full report. I think it’s an interesting reading and it does raise some important questions about the SPR. I’m personally not convinced that a government stockpile of oil is the smartest way to go.


1 comment:

Jonathan Q. Weldon said...

Another point that I thought of after class, is that we are currently stockpiling oil when it happens to be at record prices. While Ben is correct to point out that the SPR does little to effect the cost of oil on the open market (b/c the SPR is only purchasing a small amount compared to the total amount of oil bought/sold) the government is still purchasing oil for the reserves at record highs. Last I checked the people benefiting from record oil prices weren't the average Joe paying the taxes collected to purchase the oil in the first place. While I'm not sure I understand the true benefits/risks of the SPR, I do know that it doesn't make sense to purchase something at a record price unless you need it. Thoughts?