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Is the Strategic Petroleum Reserve our Ace in the Hole?

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  • Timothy J. Considine

Abstract

The Strategic Petroleum Reserve (SPR) is often touted as a vital asset in mitigating the adverse effects of oil supply disruptions on the economy. The importance of SPR, however, largely depends upon the effect of stock sales on market prices. To address this question, this study develops a monthly econometric model of the world crude oil market. Inventories, consumption, production, and prices for crude oil are determined within a dominant producer pricing framework in which Saudi Arabia adjusts output based upon market demand and competitive fringe supply. The estimation results provide additional support for the dominant producer pricing model for world oil markets and reasonable estimates of short-run supply and demand elasticities. Several model simulations are conducted to assess the impacts of SPR policies. For example, the gradual build-up of the SPR by the Bush Administration resulted in a very small, almost imperceptible increase in world prices. Similarly, the Clinton sale from SPR had minor impacts on market prices. Another simulation indicates that while SPR sales can lower world prices during a supply shock, the required drawdown would be so substantial the reserve would be significantly depleted after just a few months. These findings suggest that once played, the SPR card has modest impacts on world prices and could be easily trumped by actions of other players, including output adjustments by world oil producers.

Suggested Citation

  • Timothy J. Considine, 2006. "Is the Strategic Petroleum Reserve our Ace in the Hole?," The Energy Journal, , vol. 27(3), pages 91-112, July.
    • Handle: RePEc:sae:enejou:v:27:y:2006:i:3:p:91-112
    DOI: 10.5547/ISSN0195-6574-EJ-Vol27-No3-6
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    References listed on IDEAS

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    1. Litzenberger, Robert H & Rabinowitz, Nir, 1995. "Backwardation in Oil Futures Markets: Theory and Empirical Evidence," Journal of Finance, American Finance Association, vol. 50(5), pages 1517-1545, December.
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