NCPA - National Center for Policy Analysis

Was the Strategic Petroleum Reserve Release the Best Way to Lower Gasoline Prices?

August 17, 2011

On June 23, the Obama administration, in conjunction with other governments, announced a plan to release a total of 60 million barrels of oil from strategic oil reserves in the United States and other countries, at a rate of 2 million barrels per day for 30 days.  Within a week oil prices had returned to preannouncement levels, and by July 12 the price of crude was about $2 per barrel higher than it had been on June 22, the day before Obama's announcement.  Why did this happen, asks Robert P. Murphy, a senior fellow at the Pacific Research Institute.

Consider the perspective of the owners of large deposits of oil, such as the Saudis.  When deciding how many barrels to sell in the current period, the owners must make forecasts about the future market price of oil.  In this context, consider what happens when Obama and other leaders announce that an additional 60 million barrels will hit the market.

  • Other things equal, this additional supply will push down the current price of oil.
  • The change will give other producers an incentive to cut their own sales, deferring them to future months when they won't have to compete with the release.
  • Once the market had adjusted to the news, the price changes would be smoothed out, leaving little net effect from the policy.

In contrast, suppose Obama had announced his administration would do everything in its power to expedite the development of domestic oil and natural gas resources.

  • A policy shift in favor of domestic production would lead to an immediate reduction in the price of oil.
  • Producers with excess capacity, such as Saudi Arabia, would realize that the enhanced American production would eventually reduce the world price of oil and tweak their own output in order to sell more oil in the near term, while prices were still relatively high.
  • The net result would be lower prices right away, even though the domestic production might take years to hit the market.

Source: Robert P. Murphy, "Was Obama's Strategic Petroleum Reserve Release the Best Way to Lower Gasoline Prices?" Daily Caller, August 9, 2011.

For text:

http://dailycaller.com/2011/08/09/was-obamas-strategic-petroleum-reserve-release-the-best-way-to-lower-gasoline-prices/#ixzz1UfmoRdkd

 

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