NCPA - National Center for Policy Analysis

Just How Strategic Is That Reserve Oil?

October 6, 2000

Economists, petroleum analysts and oil industry insiders agree that there is no shortage of oil available to U.S. refiners. The only problem with oil, they say, is its price. So they see President Clinton's order to release 1 million barrels a day for 30 days as a ploy to put downward pressure on prices. Whatever effect that will have on prices will only be temporary, they predict.

A number of analysts believe that oil prices have a psychological component.

  • Robert Ebel at the Center for Strategic and International Studies observes that when prices are $35 a barrel, "a certain portion of that price is psychological, maybe as much as $6" -- noting that prices fell in anticipation of the new supply, even before the oil became available.
  • Experts say traders only have to hear more oil is on the way to cut prices.
  • Three days after the Clinton order, the Saudis pledged to pump more oil to bring prices down -- and since then prices have indeed fallen to $30.24 a barrel from $37.97 in September.
  • Critics of the Strategic Petroleum Reserve release note that under federal law "a severe energy supply disruption" threatening a "major adverse impact" on the nation's safety or economy is required to justify dipping into the SPR -- clearly not the situation when the order was given.

Some free-market analysts take a different view. The Cato Institute's natural resources expert Jerry Taylor thinks it would be preferable to sell off the entire reserve. He says it makes no sense for the federal government to stockpile a commodity in ample supply from so many sources -- especially since it costs taxpayers an estimated $60 a barrel to maintain the reserve.

Source: Douglas Austin, "Sale of Strategic Reserve's Oil Hoard No Solution for Market's Real Woes," Investor's Business Daily, October 6, 2000.

 

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