Buy Low?

Yesterday I received a question from a reader inquiring whether the price of oil has fallen to a level at which the US should consider resuming additions to the Strategic Petroleum Reserve. I hadn't looked at this issue since oil was much more expensive, when I supported efforts to halt additions to the SPR, but not to sell oil from the reserve to manipulate prices. Upon reflection my answer is no, at least for now. Oil at 50 bucks looks very cheap, relative to where it has been this year, and also to where it's likely to be again, once the global economy gets back on its feet. However, I see three primary impediments:

1. Under the law passed by Congress and signed by the President this May, filling of the SPR cannot resume before the end of 2008, or until the President certifies to the Congress that "the weighted average price of petroleum in the United States for the most recent 90-day period is $75 or less per barrel." By my reckoning, the three-month average price of West Texas Intermediate crude oil on the New York Mercantile Exchange is still somewhat above that level. As rapidly as it has fallen, it could meet that criterion in December, but with very little time for the current administration to act on it. If we use reported refiner acquisition costs, a more accurate gauge of what the nation pays for oil, the latest figure available is the $104/bbl indicated for September 2008. With August even higher, no crude could be bought without the help of the much lower assessment expected for November, which probably won't be published until January.


2. Even if that condition could be satisfied, I doubt that the administration--outgoing or incoming--or the Congress would regard buying more oil for a reserve that already holds a 160-day supply at its maximum drawdown rate of 4.4 million barrels per day as urgent, compared to the needs of addressing the financial crisis and recession. As slack as the oil market is, I'm not even sure it would help US producers. More importantly, none of the potential threats to our oil imports look so pressing that we should make adding oil to the SPR a top priority, at least for the next few months.


3. For me the most compelling reason to hold off on this buying opportunity is my hope that the new administration would not feel bound by the current administration's determination of the need for a 1-billion-barrel SPR in its current form, without further study. As I've commented periodically, the basic architecture of the SPR was designed three decades ago, in a very different world. It is in urgent need of a top-to-bottom review, to assess how it aligns with our strategic need to ensure continuity of fuel supplies to the US economy in all 50 states and to the US military wherever it operates, under various scenarios of supply disruption. Until that assessment has been carried out, we shouldn't rush to add more oil to the existing SPR.