NCPA - National Center for Policy Analysis


May 12, 2008

Over the last eight months, the Department of Energy purchased more than 10 million barrels of oil for the Strategic Petroleum Reserve (SPR) as the price rose $40 to above $120.  This is not sensible, says Lincoln Anderson, chief economist at LPL Financial.

Our current policy:

  • Puts upward pressure on oil prices at the worst possible time.
  • Wastes taxpayer money.
  • Gives aid and comfort to unfriendly nations.
  • Is an insurance policy that, for the most part, is no longer needed.

Today we have 701 million barrels of oil stored, this could replace three quarters of OPEC imports for about 150 days.  The blunt fact is that the price of crude oil on global markets is controlled by this cartel of governments: With 40 percent of world oil production, it is the biggest player, and it uses its clout.

One of its most powerful tools to control non-OPEC oil production and alternative energy development is to allow price crashes to occur from time to time, to cow the competition.  In 1985, for example, OPEC increased production in the face of weakening demand, sending prices down to $10 per barrel; it did the same in 1998.

The answer to this situation is perfectly straightforward, says Anderson:

  • We should sell oil out of the SPR when oil prices are high, say above $80 or $90 a barrel, and buy oil when prices drop below $40.
  • The SPR would then become a powerful tool to stabilize crude oil prices but at a lower level, while generating a sizable profit for taxpayers.

An SPR that is 80 percent empty is a very valuable thing when oil prices collapse.  And a full SPR is great to have when oil prices are high, says Anderson.

Source: Lincoln Anderson, "How to Use the Strategic Petroleum Reserve," Wall Street Journal, May 9, 2008.

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