Congress May Have Done Something Useful

In May, Congress passed a bill to stop adding oil to the Strategic Petroleum Reserve. This bill takes effect on 1 July. Economist Philip Verleger, as reported in the 16 June issue of Forbes, says that this will result in an immediate drop in the price of sweet (low sulfur), light crude of $20/barrel. How is this possible, given that only 60,000 barrels of oil a day are being added? This is only 0.3% of U. S. oil consumption.

The market for light, sweet crude oil is very tight and this is what is mostly being put into the Strategic Petroleum Reserve. Only 10 million barrels of oil produced each day are light, sweet crude out of the total of 87 million barrels. This is the oil that has the price we hear quoted all the time of $135/barrel. When 130,000 barrels a day of Nigeria's Bonny Light oil was lost to saboteurs earlier this year, prices for sweet, light crude shot up. The light, sweet crude comes mostly from Saudi Arabia, Nigeria, and the North Sea.

In a 29 November 2004 column in Forbes, Steve H. Hanke of The Johns Hopkins University estimated that the filling of the reserve was responsible for about $10 of the then sweet, light crude price of $55.

The government gets 185,000 barrels of oil each day as a royalty payment from its Gulf of Mexico oil field leases. It sells some and trades some for the light, sweet oil it mostly puts into the reserve. After 1 July, the government will sell all of this oil and have more income from it. This will amount to about $1.5 billion extra income in the 2nd half of 2008. We can be sure that Congress will quickly use the fact of that income increase to spend another $2 billion in the 2nd half of the year.

Steve Forbes, in the same 16 June issue, notes that Federal Reserve policy has brought about a reduction in the value of the dollar by adding to the money supply. He believes that the Fed should aim to adjust the money supply so that gold has a price between $550 and $600 an ounce. He notes that the falling value of the dollar has been responsible for a large part of the cost increase for oil.