Is Stockpiling Driving Up the Price of Oil?

Forbes.com is raising the question if it’s possible for congress to stumble into a correct or honorable action on the economic front.

Such an event seems to have occurred in May, with the passage of a bill to halt deliveries of crude oil to the Strategic Petroleum Reserve. When it takes effect July 1 the bill will cause an immediate pullback in the price of oil, as much as $20.

So says energy economist Philip Verleger. His prediction is surprising, given that injections into the reserve are just 60,000 barrels a day–0.3% of U.S. oil consumption. But he notes that much of what’s being hoarded by the government is light, sweet crude from Arabia, Nigeria and the North Sea–the stuff fetching headline prices of $135 a barrel.

The market for high-quality crude is very tight. Of 87 million barrels the world produces daily, only 10 million are light (not too gooey) and sweet (low in sulfur). That’s why oil prices spiked this year when saboteurs knocked 130,000 barrels a day of Nigeria’s Bonny Light off-line.

Verleger is extreme but not alone in his view of what federal hoarding is doing to oil prices. In a Nov. 29, 2004 column in forbes, Johns Hopkins economist Steve H. Hanke estimated that the reserve was adding $10 to the price of oil ($55 at the time).