Strategic Petroleum Reserve

The United States runs a “Strategic Petroleum Reserve” program. According to the Wikipedia page on that program, the oil stored there had a value of around $64.5 billion in February 2012. The cost for buying that oil reserve was only around $20.1 billion.

So the American government has made a profit of around $44.4 billion by running this program.

The reason for that is easily explained. Prices for oil have gone up in the several decades that program has been running. It was introduced in 1975.

Of course any oil in that reserve is not on the market. All things equal, having such a reserve increases market prices of oil (a good thing when discussing global warming).

So here is a simple idea. How about gradually increasing the number of days these reserves are supposed to cover? Put more and more of the oil from the market into the reserve.

That will lead to higher oil prices. That in turn will lead to higher valuations for the oil in the reserve. If the program scales to a sufficient level, this could be a nice positive spiral. The government could use the profits from the higher valuations for extending the reserve further, increasing the valuation even more.

This is of course only an application of Phaseout Profit Theory. Leaving more oil in the ground will lead to higher prices, and more profit for fossil fuel companies. But the same is true for the government strategic reserves.

It is also true if not the government but private companies store the reserves. The Japanese system has about 94 days of reserves in government hands and another 73 days in private owned storage (in 2010). Any private company not selling oil in 1980 but storing it until now will have made a nice profit from the increase in valuation.

Global oil reserves are around 1.3 trillion barrels, according to this Wikipedia page. In contrast, global strategic reserves are estimated around 4.1 billion barrels. The United States accounts for the largest part of that, with up to 727 million barrels of capacity.

That means strategic reserves are only about 0.3% of global reserves.

That in turn means it should not be too difficult to increase this very low percentage. Aim for something like 5% (65 billion barrels) in the strategic reserves. Take all that oil out of the market. Have it stay in those reserves. Refrain from burning it (the interesting part for countering global warming).

What would be the consequence?

The consequence for oil prices would be of course that they go up. Every barrel in the reserves reduces supply.

The consequence of that would be that whoever stores the oil will be guaranteed a profit of a trillion dollar order. For 65 billion barrels, one needs the oil price to go only up by $15 to clear the first trillion in value appreciation. Of course with that kind of scale the price would go up much more. If it goes up by another 500%, as it has already in the decade between 1999 and 2010, we would talk about oil going up another $400, with the 65 billion barrels in the reserve increasing their value by $26 trillion. And that’s only with increasing the strategic reserve to a relatively modest 5%.

A trillion here, a trillion there, and before you know it you’re talking about serious money.

The consequence of that would be that cars would stop running on stinking gasoline and switch to electricity faster. Which is exactly what we need to happen to avoid unmitigated disaster.

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