Over the years, oil price volatility has been a concern for producers and consumers
... [+]With oil prices at $80/barrel, and OPEC+ refusing to accelerate its relaxing of production quotas, some have called on President Biden to release oil from the Strategic Petroleum Reserve. Indeed, over the years, oil price volatility has been a concern for producers and consumers, although to be honest, consumers usually complain about volatile prices only when they are high and producers tend to complain about volatility when prices collapse.
And stable prices have often been described as a goal, usually by those attempting to sell expensive fuels. Enron promoted fixed price natural gas contracts, arguing higher prices were beneficial because stability avoided uncertainty. Ethanol advocates have made the odd claim that ethanol was more expensive but reduced fuel cost volatility because supposedly corn prices don’t fluctuate much .
Oil prices have been stable in the past, first with Rockefeller’s Standard Oil monopoly, later the Texas Railroad Commission and the Seven Sisters’ agreement to avoid competition). Although prices were lower than before OPEC achieved market dominance, they were actually above competitive price levels. The main difference was that taxes paid to producers, especially in the Middle East, were very low, making delivered prices low.
So, would it make sense to release oil from the SPR in an effort to moderate prices? Well, that depends on whether you think that the government is capable of knowing what the ‘correct’ price should be. This always reminds me of the Soviet era joke: Joseph Stalin wakes up in a hospital, surrounded by officials who explain that Communist medicine has enabled them to resurrect him, and that all the world is Communist now except for New Zealand. Why isn’t New Zealand Communist? He asks.
In case you are not skeptical about the ability of governments to understand what the oil price should be, the figure below shows the U.S. government’s purchases of oil for the Strategic Petroleum Reserve and the oil price over time. The first 500 million barrels were purchased when the oil price was an average of $85/barrel , which might seem reasonable considering the price is now $80, but the average price since the SPR was created has been $63/barrel.
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