Speculators driving up prices? Use the SPR!

As the CFTC decides whether to introduce more position limits on energy traders, a paper from Rice University’s James A. Baker Institute for Public Policy cuts to the chase. The main reason for hating speculators is high prices, especially when they move rapidly higher. So why not release all those barrels of oil in the Strategic Petroleum Reserve?

From Dow Jones via Rigzone:

The U.S. and other major oil consumers made a mistake last year when they decided against releasing oil from reserves as prices were skyrocketing, the study said. That inaction gave speculators the green light to hold positions in the oil futures market betting that prices would keep moving higher.

In fact, reluctance to use the reserves could have made matters worse.

“When you’re pulling oil off the market and putting it into strategic inventories, it sends a signal to all players in the market that governments are hoarding…without the intent to bring prices down,” said Kenneth Medlock, an energy fellow who co-authored the study. “That actually can send a signal to players in the market that the market is tight, and it’s going to stay tight.”

The SPR was set up in 1975 after the US, among others, was sufficiently spooked by the Opec oil embargo of 1973. Oil from the SPR has only been distributed twice for commercial sale – during operation Desert Storm, and after Hurricane Katrina. Reserves have however been ‘exchanged’ – basically, loaned – to private companies on 10 occasions, including after Hurricanes Gustav and Ike last year.

But short of selling or loaning the stuff out, the study points out the Department of Energy can temporarily stop filling the reserves – which at last count stood at about 724m barrels. In September last year they did just that:

Note that net additions were zero in July, August and October last year. But the paper says this was too late: oil was already over $100 by July.

Related links:

How effective are speculative limits in commodities anyway? (FT Alphaville, 27/08/09)
Dresdner/Commerzbank blames oil speculators (FT Alphaville, 21/08/09)
Speculation crackdown: Is regulatory arbitrage a threat? (FT Energy Source, 05/08/09)

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