The President's Idea on Increasing Oil Supply is Humorous


Yesterday President Bush gave a speech detailing plans on what can be done to lower oil prices and ultimately gasoline prices at the pump. His main solution was to increase supply by deferring Strategic Petroleum Reserve (SPR) inputs until fall. Why is this strategy flawed?

First of all, deferring inputs into the SPR does not address increasing real oil supply coming out of the ground.

Secondly, the president should be filling the SPR at today's lower prices. In the fall prices will be higher. This decision will end up costing tax payers more money in the long run. Also, an attempt to lower prices artificially today will only have the undesired effect of increasing demand. This will not help an oil market where supplies are already tight. The president's strategy did have the effect of reducing oil prices temporarily as witnessed yesterday when the price of crude declined for the June and July contracts.

Thirdly,deferring SPR inputs until fall will only make oil supplies tighter than normal in the fall. This will have the affect of causing oil prices to rise at a time when people are expecting them to recede.

In conclusion, the President's plan to "increasing supplies" by deferring inputs until the fall is flawed. No real supply increase is created. The costs associated with deferring SPR inputs until fall will only be an added burden to tax payers as the cost to do so will be at increased prices. The oil companies are smart. They have built up crude inventories that are well above historical norms. They realize prices will be higher in the future than current prices. The government is too short sighted to realize this fact. One should note that with the exception of the June and July crude oil contracts declining in price the contracts beyond July were actually higher across the board. The traders realize that crude oil demands will only be higher and supplies tighter when the government finally begins to contribute to the SPR.