NCPA - National Center for Policy Analysis

FILLING THE STRATEGIC PETROLEUM RESERVE IS BAD STRATEGY

February 24, 2005

The White House's policy of purchasing oil for America's Strategic Petroleum Reserve (SPR) is driving up oil prices. In fact, selling off oil reserves is a better strategy, according to the Heartland Institute.

The decision to stockpile or not can drastically affect prices at the pump, notes Heartland:

  • On January 16, 1991, the first day of the Gulf War, President Bush's threat to release oil from the SPR drove the spot price of oil from $32.25 per barrel to $21.48 per barrel in one day.
  • The positive spread between spot and four-month futures also declined from $5.90 to $1.65 per barrel, meaning investors were more at ease with the stock of private oil supplies.
  • Since the current administration's move to fill the SPR, which began on November 13, 2001, oil prices increased from $21.67 per barrel to currently $55.33 per barrel.

The purpose of keeping the 700 million-barrel reserve is to provide supplies in the event of an oil embargo. But oil embargoes are ineffective, as producers cannot prevent oil from being sold to embargoed countries; in 1973, for example, oil exported to Europe was simply resold to the United States.

Rob Bradley, president of the Institute for Energy Research, calls the government's oil stockpile a textbook case of government failure in the name of addressing "market failure."

Source: Jerry Taylor and Peter Van Doren, "Strategic Petroleum Reserve Inflating Oil Prices," Heartland Institute, January 2005.

 

Browse more articles on Environment Issues