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Monday, June 27, 2011

"The Strategic Petroleum Reserve Drawdown"

Jim Hamilton analyzes the effects of the International Energy Agency's plans to release 60 million barrels of oil from the strategic reserves held by 28 member countries (the US will contribute about half of this total). I think it would be fair to say he's not impressed with this plan:

The Strategic Petroleum Reserve drawdown, econbrowser

I share his assessment:

...the deed is now done, and the IEA has run an interesting experiment for us in how oil markets function. I would recommend against further SPR sales, regardless of the final outcome of the current effort. The reason is that I see the long-run challenge of meeting the growing demand from the emerging economies as very daunting, and in my mind is the number one reason we're talking about an oil price above $100/barrel in the first place.
A one-time release from the SPR, or even a series of releases until the SPR runs dry, does nothing whatever to address those basic challenges.

It's not clear how much impact this will have on prices, but if prices do drop as a result of the release, some countries may take advantage of the opportunity:

the Chinese might see a temporary drop in prices as an opportunity to add to their own SPR. To the extent that happens, we're getting back to the no-effect scenario

If we had a Strategic Job Reserve to draw upon, or something similar, e.g. an infrastructure bank, that might make a difference. But I don't think this will do much to help.

My guess is that the president is trying to signal that the administration cares about the struggles middle and lower income households face due to the recession and lack of job opportunities. But if that's the goal, there are better ways to go about it. Presently, with the focus on deficit reduction, it's not at all clear that job creation is anywhere near the top of the administration's to do list. Introducing job creation legislation, even if only to force the Republicans to vote it down, would be a much better approach to convincing middle and lower income voters that Democrats do, in fact, care about their troubles and are doing their best to help.

    Posted by on Monday, June 27, 2011 at 12:15 PM in Economics, Oil | Permalink  Comments (24)


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