Stockpiling Our Way to $120-Per-Barrel Crude?

The price run-up was predicted months ago by a critic of the Bush administration's Strategic Petroleum Reserve policy.


Now that the price of crude oil has surged past $120 per barrel, let's revisit the December prediction of petroleum economist Philip Verleger, who said this was bound to happen and blamed the Bush administration's policy on the Strategic Petroleum Reserve.

As reported here, Verleger said that he believed last fall's run-up in oil prices could be traced back to the way the administration was stashing away oil in the SPR—taking off the market a crucial amount of the favored light, sweet crude oil, the easiest oil to refine. Furthermore, he said there was a risk that things could get worse because in the first months of 2008, the Bush administration had plans to increase the percentage of light, sweet crude it stockpiled while reducing the share that is heavy, sour crude—more plentiful, cheaper, and harder to refine.

The Department of Energy has been steadfast in its insistence that it does not remove enough oil from the worldwide marketplace to make a difference in global crude prices, but Verleger argues that the analysis does not take into account the extra premium the market puts on light, sweet crude in the spring and summer months due to tough summer environmental regulations. What DOE sees as a relatively small amount may be enough to make the market go haywire, with the price rise magnified by options trading in the commodity market, Verleger argued in his detailed paper (.pdf) on the issue last December.

"Extrapolation of this fall's evidence could take prices as high as an unbelievable $120 if adult supervision is not brought to bear on DOE," he wrote. "The situation could be made even worse by the arrival of the gasoline season.... It will be a disaster for motorists. I suspect it will also be a disaster for the U.S. economy."

Although they didn't base their request on the light, sweet crude issue, last week 16 Republican senators, led by Kay Bailey Hutchison of Texas, urged the administration to immediately halt deposits of domestic crude oil into the SPR until the economy stabilizes. Several Democratic senators have been calling for a halt and, indeed, a release of oil from the SPR, for some time.

In response, President Bush used the threat of terrorism to fend off pleas to change course.

"One of the things al Qaeda would like to do is blow up oil facilities," Bush said. "Understand, we're in a global market. An attack on our oil facility in a major oil-exporting country would affect the economies of their enemy—that would be us and other people who can't stand what al Qaeda stands for.... And, therefore, the [strategic reserve] is necessary, if that's the case, to be able to deal with that kind of contingency."

Of course, no one is saying that the strategic reserve isn't necessary. Verleger, for instance, says the administration should consider selling off sweet crude and buying cheaper sour crude to fill the reserve. And Hutchison and the Republicans point out that the SPR now has 25 percent more oil than when Bush took office. Indeed, at more than 700 million barrels, the strategic reserve is at its highest level ever and holds oil equivalent to 58 days of import protection.

For now, that oil is staying in salt caverns on the Gulf Coast while motorists are left to ponder how much more economic damage al Qaeda could mete out than the soulless global petroleum market has already inflicted. The DOE has solicited contracts to add up to 13 million more barrels of oil to the Strategic Petroleum Reserve.