November 21, 2004

AND LOWER (via Tom Morin):

Take $10 off the Price of Oil (Steve H. Hanke, 11.29.04, Forbes)

In November 2001 George W. Bush ordered the government to purchase oil and fill its reserve to full capacity of 700 million barrels. The reserve, at 670 million barrels, now accounts for 70% of U.S. oil inventories. While the stockpile's growth has left the nation's total oil inventories 10.6% higher than in December 2001, it has crowded out private stock-building, with private stocks declining by 9.2%.

The government's weight in the market for storage has been significant in pushing prices to such extraordinary levels. Many people have trouble swallowing this fact. They think government purchases are nothing more than a drop in the bucket and couldn't possibly have much effect on oil prices. To make their case, they trot out statistics about how small government purchases have been--only 1.3% of oil imports in 2004 and minuscule fractions of total U.S. consumption or world output. But this is comparing apples and oranges. If we just look at changes in inventories since December 2001, the changes in the government stocks dwarf those in private inventories.

I estimate that the government's buildup of oil stocks has added at least $10 to the price of a barrel. That's the bad news. The good news is that the government's reserve is scheduled to be at full capacity in May 2005. From that point on it will be much easier for private companies to build stocks. Indeed, when the government stops building inventories, enough oil will be freed up so that private stocks could rise to their 2001 levels in six months. A $10 decline in price is plausible.

It turns out that this inventory story is already in the market. Today's quotes for oil futures contracts are lower than today's spot price. Traders expect the price of oil to decline and return to its ordinary range. These traders, playing for real money--not for quotation in the newspaper--do not buy the notion that we have entered a new era of permanently high oil prices.

We are still left with one issue: what to do with the oil in the stockpile. It's worth $30 billion. Its eventual release is at the discretion of the President--in other words, tangled up in politics.

Nothing speaks better of the President than that he did not take political advantage of this even in an election year.

Posted by Orrin Judd at November 21, 2004 10:34 AM

You mean we have been paying top dollar to build our oil inventories, when we could have just stolen it from Iraq? Some War for Oil, this is. (Worse, we fascists can not even rejoice in the fact that it was Halliburton selling it, for a profit. It was George F. Soros!)

Posted by: Moe from NC at November 21, 2004 11:53 AM

I thought it was the speculators that were driving the price up. Turns out it was the US government. Great, I'm relieved, cheap oil forever!

Posted by: at November 21, 2004 12:13 PM

Sorry, that was me. Using a new browzer, Firefox.

Posted by: Robert Duquette at November 21, 2004 12:14 PM


Both, thgough the speculators bailed after election day.

Posted by: oj at November 21, 2004 12:22 PM

Too bad the Chinese haven't bailed.

Posted by: Robert Duquette at November 21, 2004 12:48 PM

(Too)-cheap oil fails to encourage production or conservation. I don't understand filling the SPR with $50 crude, but I also commend the president for not releasing stocks to lower prices and help his reelection effort. If fuel at the pump had been $.50/gallon cheaper, his victory margin would have been much greater.

And I suppose that in the long run, it doesn't matter that much if the SPR is filled with $30 crude or $50 crude.... if the Treasury can borrow at 3% or so to pay for the crude.

Posted by: J Baustian at November 21, 2004 2:38 PM


It's a beauty ain't it?

Goodbye IE you won't be missed.

Posted by: M Ali Choudhury at November 21, 2004 3:07 PM

If the President was so committed to filling the Strategic Reserve that he was willing to damage his own re-election bid, it suggests that he is convinced that there may be some Middle Eastern oil supply interruptions coming.

Watch out, Iran.

Posted by: Michael Herdegen at November 21, 2004 9:17 PM