Cutting Oil Prices, Open The Strategic Petroleum Reserve

OPEC President Chakib Khelil says that petroleum prices will stay at the current levels until the end of the year. Call him an optimist. For the US, that means $108 crude and gas prices near $4. This would be a brutal blow to an already staggering economy.

The US government has argued that the value of the dollar and speculation are not the primary causes of rising oil prices. Washington figures that demand is being pushed up by a need for petrol in emerging markets including China and India. In China, where gas and diesel prices are kept low by the government there is not reason for demand to be throttled. A number of big oil producing nations are also keeping more crude in country. They want to build their own infrastructures and drive their own Cadillacs.

Bush and his men have gone to OPEC, both in public and private and come within a whisker of begging for an increase in production from the cartel. Perhaps they understand that even the psychological benefit of pumping more oil would take some air out of the oil price balloon.

According to MarketWatch, China has elected to build its strategic oil reserves, crude bought and put into the ground for a rainy day, to 100 million barrels by 2010. The financial website reports "China’s goal is to build strategic oil reserves equivalent to 30 days of imported oil by 2010, says China’s top economic planning administration ." The net result of China buying that extra crude should take prices up even further.

The US has a big pool of oil of its own.  Based on information from USA Today "The government stockpile consists of more than 700 million barrels of crude oil stored in underground salt caverns in Louisiana and Texas."

The government did not pay $100 a barrel for that oil. It has been there a long time, just sitting. The average price of the black stuff is probably closer to $20 or $30.

If the administration believes that the reason for high oil prices is supply is lack of OPEC production increases, it has a way to make its point. It should open the Strategic Petroleum Reserve and increase the amount of crude available for refining in the US. The announcement alone should drop prices by ten buck a barrel. The US government may have to buy that supply back at higher prices, but that is not terribly different from the Fed taking mortgage paper from banks in exchange for hard dollars. Both underwrite economic expansion.

Oil speculation is like shorting stocks. If oil falls quickly because the US government pushes more supply into the market, those betting on higher oil will have to cover. That would take prices down further, and very fast.

Douglas A. McIntyre