Yesterday’s Wall Street Journal carried an essay by Austan Goolsbee in which he advocates reducing the size of the Strategic Petroleum Reserve. Even better, he suggests a rule by which the SPR could be managed in a transparent fashion: aim to be able to replace 90 days worth of imports from non-North American sources.
Goolsbee noted that “economists are generally uneasy with the whole idea of the strategic reserve. Self-sufficiency is not really an economic concept, and it seems an odd goal for a product that trades freely around the world at a market price.” He argues, though, that we need not grapple with that issue to grasp the case for reducing the current size of the SPR.
His argument runs like this: “self-sufficiency” is a kind of physical insurance against disruption; the economics of insurance are well understood, as the size of the risk falls then less insurance is needed; and the boom in domestic U.S. and other North American production has reduced strategic risks. Therefore, we need less SPR insurance.
Interesting aside: Notice that so conceived, domestic oil production provides a public good in the form of reducing strategic risks faced by the country. Would Goolsbee agree that his logic supports the idea of a subsidy to domestic oil production?
Previously I’ve said here that I have never been “much of a fan of the SPR, having never been convinced that there was a coherent economic and political plan for management of the reserve during either the accumulation or release phases of operation.” While in principle oil is supposed to be released only when the United States is economically threatened by a disruption in oil supplies, in practice SPR management has been a less than transparent mix of strategic, political and practical considerations. (See the DOE history of SPR drawdowns here, which mostly minimizes the political angles.)
Goolsbee’s suggestion supplies a potentially coherent, non-political rule to govern operations during normal times (i.e. times lacking a market disruption threat), it doesn’t provide any guidance for the much more critical emergency release phase of operation. I’m still anti-SPR.
IN RELATED NEWS: China is believed to be building up its strategic oil reserves, also from the Wall Street Journal.