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Drain the Strategic Petroleum Reserve

by Index Investing News
October 23, 2022
in Economy
Reading Time: 2 mins read
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I’m as willing as many to criticize Joe Biden for his largely horrible economic policies. But we should still give credit where credit is due.

And he’s due some credit for his sales of oil from the Strategic Petroleum Reserve.

There are 2 justifications for his selling oil from the SPR currently. One is philosophical; the other is pragmatic.

The philosophical justification is that the government shouldn’t be in the business of supplying oil. One of the strongest arguments for futures markets is that they give private actors a strong incentive to store oil when they think the price will rise in the future and to sell oil when they think it will fall in the future. The government gums up the works by being an unpredictable participant in the market for oil. So it’s best not to have the government in that market at all. The way to get to that point is to sell the oil.

The pragmatic justification for selling oil right now is that the current price is unusually high and will likely be lower. The spot price of oil on October 20, reported by the Wall Street Journal on October 21, was $85.98 per barrel. The futures price for December 2023 was reported as $74.81. So this is a good time to sell.

When I was the senior economist for energy policy with President Reagan’s Council of Economic Advisers, one of my two bosses, Bill Niskanen, and I knew that we wouldn’t get far advocating what we both believed in: ending the SPR. So we instead advocated a price rule: buy low, sell high. Specifically, if I recall 1983 prices correctly, we advocating buying when the price of oil drops below $20 and selling when it goes above $40. We didn’t get what we wanted, but Biden is coming close. He’s selling when it’s high and I’m guessing that he’ll buy when it’s lower.

But isn’t the SPR meant to deal with crisis situations? To some extent, yes. But how do you know there’s a crisis? That’s why Bill and I came up with a price rule. If there’s an oil supply crisis, that will show up in the price.



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