Thursday, October 21, 2004

Oil Flow and Cash Flow

It's easy to become queasy when governments create and manage commodity stockpiles. So it is with the Strategic Petroleum Reserve which has (inevitably) been politicized.

As with all "good ideas", a minute's thought about such reserves suggests they are not. Steve H. Hanke summarizes all of this very nicely in today's WSJ ("Over a Barrel"). He even suggests how to make a good idea out of a bad idea:

" ... why not replace government-mandated release rules with a market-based approach? To do this, the government should sell call options on its oil stockpile. By doing this, it would generate revenue to defray some of its stockpiling costs. More importantly, the market would decide the release rates for the SPR. In consequence, the volatility in the oil markets would be dramatically reduced. In addition, spot prices would fall like a stone and once again be lower than futures prices."

Politicians (and media and other elites) do not easily grasp or accept economic thinking. Yet, Hanke's idea includes a cash flow aimed in their direction.