Every time oil prices get high, the SPR becomes a central issue. I really like Kopits' analysis here - I think he may be right that the impact of the SPR might hold off an oil shock. At the same time, the question is whether we would then be able to build it up again, and whether we face greater subsequent shocks.
The SPR holds 727 million barrels of crude oil, about 40 days of US consumption and 70 days of oil imports. In addition, the US has about 1.1 billion barrels of commercial crude oil inventories. All in all, the US has sufficient domestic crude oil stocks to cover about six months of imports. But it is one thing to hold such reserves, another to deploy them.
As we look forward at Douglas-Westwood we see a greater than 50% probability of an oil shock by 2013; indeed, given recent high oil prices, the US could find itself back in recession by summer. Notably, when crude oil consumption has exceeded 4% of GDP, the US has typically fallen into recession - in some cases in as little as 30 days, and generally not more than six months. Crude consumption as of April 22 stood at 6% of GDP, well in excess of the historical threshold.
In light of this, should the SPR be activated as a price-moderation tool?
Interestingly enough, many in Washington are opposed. These objections are largely ideological: that governments should not manipulate market prices as a matter of principle; that such a capability would permit more misguided, incompetent, or corrupt meddling; that interfering would garble market signals and, in effect, confiscate upside earnings of those who bet long in markets; and that it would not help anyway. All of these objections may be legitimate, but given the stakes, a deeper look would seem warranted.
Begin with price manipulation. Oil is believed different from other commodities, say, copper or coal. Neither of these is associated with economic traumas; no one has ever heard of a 'copper shock' or a 'coal shock.' Oil is special in that other economic activities depend upon it. Without an automobile, most Americans cannot get to their jobs, schools, or stores. Therefore, oil is arguably unique, and when its price rises too high, an oil shock devastates the US economy. Therefore, the manipulation of oil prices - beyond a certain threshold - could indeed be justified if it prevented a recession.
Read the whole thing - well worth it! I'm not sure I necessarily agree with Kopits' conclusions, but I think his analysis of the role of the SPR is spot on.
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Using the SPR as a price moderation tool would be an unmitigated disaster. Wall St would immediately use it as a free insurance policy on short-term reduced volatility while piling the risk onto the "too big to fail" fat tail of 40+ days of trouble. The historical vol figure would go down, making the implied risk look far lower than it is.
This is what happened in the mortgage market, the auction rate security market, and the credit markets.
Holding 727/(1100+727) of the US petro reserves with a mandate to smooth prices makes you a sucker unless you have a really clear understanding of contango and backwardation. Oh, and the US govt doesn't unless they have a Houston office with traders earning seven figures.
Save the petro for when you really need to keep the military moving or breaking a blockage.
... oil is arguably unique, and when its price rises too high, an oil shock devastates the US economy. Therefore, the manipulation of oil prices - beyond a certain threshold - could indeed be justified if it prevented a recession.
Given how pervasive oil is in our society -- not just fuel, but source of drugs, chemicals, road tar, plastics, pesticides and about 5000 other things -- Kopits' statement is both a very bad understatement AND a gross generalization. Yes, oil shocks devastate the economy; almost all of the recessions in decades are linked to oil troubles. But any idea of using the SPR to "prevent a recession" doesn't work under the current circumstances. It might have in the 1990s, but our society in 2011 is much more fragile b/c the infrastructure is toast.
If we weren't already deep IN recession (as any regular person knows, it didn't end in 2009 except among the rich), it would only delay such recession. But with the structural problems we haven't solved despite the 2008 crash still in play, that delay promises to make the real situation far worse. We NEED to slow everything down to give our communities time to relocalize and reacquaint ourselves with what it really means to be a civilization (i.e solving problems by collaborating with our neighbors).
Besides, why do we need to open the SPR ... we just did so by opening the spigot from Libyan rebels? Why use our resources when we can take it by force? (/sarcasm)
If Iraq wasn't already, Libya will probably be seen as the first of the World Resource Wars. The rest of 2011 and 2012 promises to be a very interesting period, in the Confucian sense...