Common Tragedies

Thoughts on Environmental Economics

Shhh, don’t tell Evan, I am going to post on the SPR

Posted by Daniel Hall on April 11, 2008

You only have to click here to see that I am not the resident SPR expert. But Evan is away on vacation this weekend, and I couldn’t let this go by:

Since current SPR additions are only 0.07 MBD (70,000 bbl/day), how much effect could foregoing them have on oil prices? Measured against 85 MBD, virtually none, but that’s not the relevant comparison. What really counts is the Mid-continent light sweet crude system.

With its three current royalty-in-kind swaps consisting of 58% sweet crude grades, according to a DOE spokesman I contacted this morning, the government has a 40,000 bbl/day lever with which to nudge the balance point of the physical WTI market by reselling the oil that would otherwise go into the SPR. Because that still only amounts to a few percent of actual WTI deliveries, I wouldn’t expect the market to drop by $10/bbl. But when you add the psychological impact of the government shifting its stance from buyer to seller–a net swing of 80,000 bbl/day–I wouldn’t be surprised to see a change in the speculative logic driving oil ever higher. That ought to be good for at least a few bucks per barrel, and a bit less exuberance going forward.

The basic argument as I read it is that the entire oil market is mostly resting on the back of the market for light sweet crude, and there is probably excessive speculation in the light sweet crude market. Pulling government support for even a tiny fraction of the market could scare off enough speculators to get prices to fall across the global oil market by more than you would initially suspect.

Also, Evan should get some credit. He has apparently leveraged his enormous influence through this blog to convince one of the presidential candidates to argue that we should suspend SPR purchases.

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