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Trump: Transform the U.S. Strategic Petroleum Reserve into an Oil Bank

September 27, 2019 in Economics

By Steve H. Hanke

Steve H. Hanke

Following the attacks on key crude oil production facilities in Saudi Arabia, President Donald Trump announced the authorization of the release of oil from the U.S. Strategic Petroleum Reserve (SPR) to keep the market well supplied. This move changes nothing in the way the SPR is governed. The market, not the President, should determine the release of the massive SPR.

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Government stockpiles are nothing new. The U.S. has had a long and fatal attraction to hoarding commodities for national emergencies. Indeed, the government has squirreled away everything from aluminum to zinc. But, the mother of all these commodity hoards is the SPR. Established in December 1975, it consists of five underground storage facilities hollowed out from salt domes in Texas and Louisiana. At present, they hold 645 million barrels of crude oil, over 1.5 times greater than the amount in private U.S. inventories. The massive SPR inventory would fully supply U.S. crude consumption for almost an entire month.

With an average price paid of $29.70 per barrel of oil, the current SPR inventory has cost the U.S. government $19.2 billion to fill. Even at today’s market prices, the increased value of this crude inventory does not make up for the opportunity costs of carrying it for so long. This is all just a drop in the bucket when compared to the capital costs of constructing and maintaining what is probably the greatest white elephant in the United States.

The SPR — like the other government stockpile programs — has had a stormy history. One of the more outrageous episodes occurred in late 1978. The Saudis cut a deal with the Carter administration to stabilize oil prices by increasing their output. In return, the U.S. agreed to stop purchasing oil destined for its stockpile, giving the Saudis de facto control of the SPR. The Saudis knew the oil markets and the importance of seemingly small changes in the demand for inventories. They also knew that the Americans would keep their end of the bargain and that they would not.

In the 44 years following its creation, the SPR has only been tapped three times for emergency purposes: during the Persian Gulf War in 1991, following Hurricane Katrina in 2005, and in response to NATO’s involvement in the Libyan Civil War in 2011. Even though the …read more

Source: OP-EDS

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