Fill The US Strategic Petroleum Reserve

August 10, 2016

The US created a Strategic Petroleum Reserve in 1975, after the Arab oil embargo (and a stupid US rationing scheme) caused supply disruptions. Today, this reserve holds only a little over one month’s of oil usage.

Assuming that there is a real need for this Reserve, I would hope that it would be run using some basic economic and market principles. Right up at the top of the list of Market Principles is the Commandment: “Buy Low and Sell High.”

The Price of Oil today is on the low side over the last 40 years, on an inflation adjusted basis. Back in 1973-1974, the Price of Oil went from under $10 a barrel to the mid-$30s. While the nominal Price today is in the low $40s, adjusted for the CPI, oil is under $8 a barrel in 1975 Dollars. (The CPI is a low-ball number, so maybe $5 is closer.)

It was only 7 years ago that oil was traded (briefly) at $140 a barrel, or about $155 in 2016 Dollars after inflation adjustment. That was a high Price of Oil.

The wonks in Washington DC who manipulate markets in their attempt to prevent financial Armageddon have been using tax Dollars to buy oil futures contracts in an effort to keep banks from having their oil patch loans defaulted on. You and I are paying to keep banks whose loan officers screwed up from going belly up. And, we’re getting nothing in return.

I say, if the Strategic Petroleum Reserve has any real value of protecting the future of the US against a potential oil disruption, then right now – while the Price of Oil is low by historical standards – we should be filling up the Strategic Reserve tanks.

Buy Low, and Sell High.

While this likely would cause quite a stir among the Green, anti-Energy, anti-Fossil Fuel crowd, this seems like a no-brainer to me.

Man has had the ability to separate silver from lead for as far back as 4000 B.C.

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