Streetwise Professor

February 28, 2011

No SPiderR Sense

Filed under: Commodities,Derivatives,Economics,Energy,Politics,Regulation — The Professor @ 8:55 pm

The lack of a coherent Strategic Petroleum Reserve strategery has apparently been an issue for quite awhile.  John McCormack points me to something he wrote for Regulation in 1996:

Owners of above-ground crude oil and refined product inventories have an important role to play. It was just such a role that the Strategic Petroleum Reserve (SPR) was meant to serve but has not. While it has accumulated a crude-oil stockpile of well over half a billion barrels, the SPR has never had a coherent, systematic strategy for selling crude oil during periods when prices spiked upwards. Only small amounts were sold from the stockpile during the 1990-91 Persian Gulf War, and then only after prices had begun to decline from their peak. For the stock- pile to have been of any use during periods of distress, SPR managers needed to have a coherent strategy in place and should have communicated their intentions beforehand. Part of the Energy Department’s reluctance to sell barrels from the SPR resulted from fears that they would be reducing the stockpile before the shortage was greatest. They could have avoided this problem by doing time swaps that would not permanently reduce the stockpile.

The Senate Permanent Subcommittee on Investigations published a report in 2003 (almost exactly 8 years ago, in fact) that also ripped the SPR for its failure to act in a commercially reasonable way, thereby distorting oil prices.

Given that a Cato publication and a Carl Levin-chaired committee came to identical conclusions, I think it’s safe to say that SPR has not operated according to sound economic principles.

The SPSoI report also has a lot of stuff on manipulation, including a lot of quotes/cites from me before I was SWP 🙂  I talked extensively with one of the staffers who authored the report while he was preparing it.  I haven’t read it in years and on re-reading was kind of taken aback to see how much of what I told him made it into the final report.  So, even if I do say so myself, it’s a pretty good primer on manipulation generally, and oil market manipulation more particularly.

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