A simple proposal

Wouldn't it be great if there was one simple act that could radically alter the world economy. Well, first of all, let's ask what the problems are:

1. Energy prices are high. Actually, all commodity prices are high, despite long-term downward trends. But oil is unreasonably high, and the high prices are based as much on market sentiment and fears about the instability of the Middle East as underlying supply and demand.

2. Consumers have overextended on credit. If credit becomes more expensive this could become a crippling problem.

3. Interest rates are inflexible. They are falling, but inflation fears limit the scope of the falls. With the dollar very low and commodity prices high the chances of inflation re-entering the system if credit becomes cheaper are high.

So, wouldn't it be great if the US government could do something which would simultaneously bring energy prices down and put the dollar up. Both of these trends would undercut inflation and allow the Fed to cut interest rates, easing the credit squeeze.

Actually, there is a policy measure that would achieve all of these goals. The US government could run down its Strategic Petroleum Reserve, which currently stands near record levels. Like most government interventions in the market the SPR was sold as a measure to help consumers, but actually rigs the market in favour of suppliers. It maintains the oil price at an artificially high level. It currently holds about $70 billion worth of oil.

Releasing that oil at a controlled rate into the market would put downward pressure on the oil price. If the US government bought $70 billion of dollars it would boost the dollar's price in foreign exchange markets.

Dick Cheney recently commented that Saudi Arabia could not signigicantly boost its capacity. But the maximum release rate for the SPR is around 4.4 mbbl per day - around 50% of Saudi Arabia's daily production, or more than Kuwait and Iraq combined. The government could continue to release oil at that rate for more than five months.

Would this reduce America's energy security? Not really. It is not the job of the government to purchase and stockpile commodities. If the oil industry is concerned about being able to supply the American market in the event of a supply chain interruption then it should stockpile supplies. That the government does this is $70 billion of corporate welfare for oil companies.

In any case, the biggest bottleneck in supplies to the US market is in refining capacity, not crude oil production capacity.

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