[jamest]

If oil importing nations were smart, they would buy oil while the price is relatively low and put it in a tactical petroleum reserve. This would have two benefits: it could provide a price floor, and it would create a reserve that would preclude mitigate the inevitable speculative price runup that would occur as the market tightens.

It is very important to provide a price floor in order to encourage investment in energy production of all forms and to discourage excessive consumption. It was the failure to do this in the 1990's that led to the runup to extremely high prices that we have experienced. Providing a floor price of, say, $50 to $60 a barrel creates a more stable fiscal environment within which investment can be made in all forms of energy development.

The importing nations could share the cost of the reserve purchases proportionately to consumption and their relative wealth. For example, the United States consumes approximately 25% of the world's oil production and has a high per capital GDP. It would not be unreasonable to expect it to purchase 30% to 35% of the oil for the tactical reserve.

If the importing nations were to place about 1 billion barrels of oil into the reserve, the US's share would be 1 million barrels of oil per day. The the US's annual cost would be about $22 billion, assuming an average purchase price of $55 per barrel, and a storage and transport cost of $5 per barrel (the same as the cost of storage and transport for the strategic petroleum reserve).

The $22 billion expenditure could be financed by an excise tax on gasoline and diesel of about $.12 per gallon, assuming annual consumption of 139 billion gallons of gasoline and 39 billion gallons of diesel (the same as those experienced in 2007).

The oil would be stored in leached salt domes, as they are in the strategic petroleum reserve. Salt domes occur extensively in the US Gulf Coast and in northwestern Europe.

The advantage of storage in salt domes, other than low cost, is that reserves stored in this manner can be drawn down very quickly. I don't have good numbers on the maximum drawdown rate, but I understand that the SPR, which contains about 800 million barrels of oil, has a reported maximum production capacity of 4 million barrels per day. Conversely, 800 million barrels of oil in a conventional oilfield can typically be drawn down at a rate of about 200 thousand barrels per day without damaging the reservoir.

Accumulation of a reserve of 2 or 3 billion barrels after a few years would establish a large enough spare production capacity to preclude a speculative runup. If a surge in price were to begin, price could always be forced down first by reducing or even eliminating purchases for the reserve, and then by drawing down the reserve if necessary.

There are a number of possible variations on this theme, but the basic concept is for importing nations to intervene when oil price is low in order to provide a floor price and to create spare production capacity that is under their control. This could be done quite cheaply and quickly.

[MonteQuest]

So, the solution to declining supply is a new consumer?

[jamest]

So, the solution to declining supply is a new consumer?

No, the solution to declining supply is establishing a stable fiscal environment for investing in alternatives.

[Revi]

Now that oil is down again are we refilling the Strategic Petroleum Reserve? I thought that when the price went below $70 we were going to fill it again.

Anyone know if we are doing it?

[MonteQuest]

No, the solution to declining supply is establishing a stable fiscal environment for investing in alternatives.

Ah yes, the price volitility is not good for business.

But creating a huge new consumer of crude oil will push prices up. And what if the new demand you create exceeds production capacity? Then you get a spike.

Even if you could create such a reserve, it would only work for a very short time and maybe only once.

How could you possibly store billions of barrels of oil to cancel price spikes or volitility.

Sounds like another short-sighted, short-term fix.

[MonteQuest]

No, the solution to declining supply is establishing a stable fiscal environment for investing in alternatives.

And doing it twenty years before the peak, according to the Hirsch Report.

Do you believe the peak to be twenty years away?

[MonteQuest]

Now that oil is down again are we refilling the Strategic Petroleum Reserve? I thought that when the price went below $70 we were going to fill it again.

Anyone know if we are doing it?

The return of SPR emergency exchange oil as a result of damages caused by the hurricanes is scheduled to start in January 2009.

[Revi]

Thanks, Monte. At least they are refilling it. I think they decided not to do it for a while. I hope they have it filled again before next fall's hurricane season, or something else happens.

[MonteQuest]

Thanks, Monte. At least they are refilling it. I think they decided not to do it for a while. I hope they have it filled again before next fall's hurricane season, or something else happens.

Congress passed legislation to divert the oil for a time.