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Shell Game Is Not an Energy Policy

Posted By David Kreutzer, Ph.D. On July 1, 2011 @ 12:05 pm In Energy | Comments Disabled

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Releasing 30 million barrels of petroleum from strategic reserves is not an energy policy, and it is not an especially useful response to either short-run or long-run pressures on gasoline prices. Because the release is scheduled to stop in 30 days, market adjustments will partially offset the release’s impact in the short run. And in the long run, there is no additional output. In fact, the current released oil will need to be replaced in the future.

Most of OPEC is producing at capacity, so the notion that it is an effective cartel is suspect. Even if it were an effective cartel, the real threat to its dominance would be a sustained increase in production, not a shell-game swapping of petroleum reserves.

The U.S. has about 1.08 billion barrels of petroleum reserves—about 725 million of which are in the Strategic Petroleum Reserve (SPR). The remaining barrels are privately controlled and are used to buffer short-run changes in demand and to hedge against price changes. If traders think prices will rise, they hold more in private reserves to sell later at the higher price. If traders think prices will fall, they sell reserves to take advantage of the relatively higher current price.

From the beginning of the year until the third week in May, private crude oil reserves [2] rose by more than 40 million barrels, with nearly 17 million barrels added in the final five weeks. In the month that followed, the reserves declined by 14 million barrels. Though current reserves are high compared to historical averages, they are not within 30 million barrels of their peak.

So, if the SPR draw down and replenishment signals to the market that there will be a slightly lower price now than previously expected—and a period of slightly higher prices than previously expected will follow—there very likely will be some offsetting changes in private reserves. It would be like the bank calling to tell you it transferred money from your savings account into your checking account. If that’s not what you wanted, you would transfer the money back into savings, and your spending would not change. Indeed, the current price has mostly erased the downward blip that immediately followed the president’s announcement of the SPR release.

On the other hand, policies that increase actual production will change the price. To continue the banking analogy: If you got a raise, your income would rise and so would your long-run spending. Moving money from one account to another does not make anybody richer. Getting a raise does.

To help gasoline consumers, the president should work to open up access to the billions of barrels of petroleum reserves in the U.S. Instead, the administration continues blocking access to our own petroleum production and slow-walking permits where access is allowed.

Cross-posted from National Journal [3]


Article printed from The Foundry: Conservative Policy News from The Heritage Foundation: http://blog.heritage.org

URL to article: http://blog.heritage.org/2011/07/01/shell-game-is-not-an-energy-policy/

URLs in this post:

[1] Image: http://www.foundry.org/wp-content/uploads/oil-rig-6-23-11.jpg

[2] private crude oil reserves: http://www.eia.gov/oil_gas/petroleum/data_publications/weekly_petroleum_status_report/wpsr.html

[3] Cross-posted from National Journal: http://energy.nationaljournal.com/2011/06/tapping-oil-reserves-what-prec.php#2019391

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