Steven R. Kopits

On June 23rd, the International Energy Agency (IEA) and the US government announced the intention to tap strategic petroleum reserves (SPRs) of the US and other countries, with an eye to reducing oil prices. The US was to provide 30 million barrels (mb) and other countries a similar amount, for a total draw of 60 million barrels.

In a Brookings Institution presentation in early 2009, UCSD economist James Hamilton suggested that the government think of using the US Strategic Petroleum Reserve (SPR) to counter high oil prices. Although the suggestion failed to gain traction at the time, recent upheaval in the Middle East is once again putting the future of the SPR back on the agenda. Should the reserve be drawn to cool oil prices which have surged on the back of lost Libyan crude output? I must admit I was somewhat cool to the idea when Hamilton published his Brookings paper, but his suggestions often prove prescient and therefore deserve closer examination.

The price of oil is once again daily in the news. The Western Europe benchmark Brent crude has hovered near $100 / barrel for much of the last month, and the IEA is again warning of the burden of oil consumption. Is this a harbinger of things to come, or a mere statistical blip in a market that is “well supplied”? How will events play out in oil markets in the coming year or two?

Five years ago, John Tierney, a columnist with The New York Times, and Matt Simmons, peak oil guru and founder of energy investment bank Simmons & Co., made a bet. Simmons argued that oil prices would be much higher in 2010. Tierney, a believer in human ingenuity and a follower of economist Julian Simon, took the other position. Simon, a so-called Cornucopian, argued that there would always be abundant supplies of energy and other natural resources and that the real price of commodities like oil would remain stable or decline over time.

As we look to the future and recovery, what should we expect? Will US oil consumption recover, or is the country fated to make do with permanently lower levels of oil consumption?