Wrong Reason to Tap Reserves

WASHINGTON (THE WALL STREET JOURNAL via Dow Jones Newswires), Mar. 2, 2009

Unlike some of the other black holes into which Washington pours money these days, the Strategic Petroleum Reserve's value is grasped easily. If needed, it could replace about 44% of daily U.S. oil imports for more than five months.

In 30 years plus, there have been only two emergency releases, connected with war and hurricanes. President Barack Obama, however, has said he would consider tapping the SPR simply to cool surging oil prices, a position repeated recently by the Department of Energy.

That would be a mistake. Markets are subject to psychology: Prices rise if future shortages are feared, even if immediate supplies are adequate. That's why OPEC focuses on preventing global oil inventories rising too far. Opening up the SPR's taps would push prices down temporarily. But inventories aren't output and must be replaced eventually. Using the SPR like this would also change market psychology. Its very existence arguably affects behavior already: Since 1981, as the SPR's stocks have risen from the equivalent of 10 days of consumption to almost 40, commercial stocks fell from around 80 days to 50. Producers, including OPEC, would cut output. And, like a managed exchange rate, the White House might find itself defending an "oil price target."

The irony is that the recent price spike was exacerbated by officials filling the SPR with valuable, low-sulfur grades of oil. Not doing that, rather than releasing oil, would have mitigated the squeeze on the market. As government's economic role expands, it's worth remembering that sometimes less is more.  

Copyright (c) 2009 Dow Jones & Company, Inc.