President Donald Trump announced a few days ago that the US Department of Energy (DoE) will purchase “large quantities of crude oil” to be stored in the Strategic Petroleum Reserve (SPR), created under authority of the Energy Policy and Conservation Act of 1975, enacted in the wake of the 1973–74 oil “embargo” imposed by the Arab members of the Organization of Petroleum Exporting Countries (OPEC).

The SPR at present contains about 635 million barrels (mmb) of crude oil in its salt domes, with a total capacity of 713.5 mmb; accordingly, the goal of filling the SPR to capacity would yield purchases of about 78 mmb. There are four SPR storage sites, with respective capacities available for additional oil, in mmb, of about 4.2, 26.7, 16.9, and 30.7. The Trump announcement emphasized the opportunity to acquire additional crude oil at prices suppressed sharply by a global economic slowdown attendant upon the COVID-19 pandemic and by the strenuous tug-of-war over production quotas and prices between Russia and Saudi Arabia.

Expecting exceptionally low prices now to rise sharply (that is, faster than the rate of interest) over the foreseeable future is a problematic strategy, given that the price today is the best market evaluation of the price tomorrow for a natural resource that can be consumed either today or tomorrow. (Consumption is “substitutable” over time.) After all, if a sharp price increase is expected tomorrow, the price would rise today. One central purpose of stockpiles — they are a form of insurance — is to shift the availability of supplies into uncertain future periods when the value of those supplies is predicted to be relatively high. An example: a future period during which there is a serious supply disruption.

The purchases Trump announced are intended to prop domestic oil prices up, thus implicitly subsidizing domestic producers. But the magnitude of that effect is likely to be slight, given that the notional purchase of 78 mmb would be less than one day of global oil production of about 100 mmb and only about six days of daily US production of about 12–13 mmb.

For now, it is useful to recognize that much conventional wisdom about the rationale for a government oil stockpile continues to be driven by the “embargo” thinking from decades ago, the fallacies of which I discuss below. One former senior official at the DoE argued the following in support of the new Trump policy: “I am in the camp of keeping the SPR at full capacity and using it as needed in case of supply emergencies.”

However ubiquitous, such thinking — the SPR as a hedge against supply disruptions — raises a fundamental question. Why would a government oil stockpile be necessary (or economically efficient) in a world in which the private sector can foresee the near certainty of oil supply disruptions, thus leading it to stockpile oil on its own? Does the private sector have incentives to stockpile too little? Precisely what is the rationale for a government oil stockpile?

One argument in favor of the SPR might be that the federal government — Congress, senior executive-branch officials, and the bureaucracy — has better foresight about the likelihood and magnitude of future oil supply disruptions. That premise simply does not pass any test for bare plausibility: Producers, buyers, and shippers of oil, ad infinitum, have powerful incentives to maintain a minute-by-minute vigil of all things international oil market in the hope that opportunities for profits (that is, efficient reallocations of oil) might emerge.

Another argument might be that the federal government has a longer time horizon than the private sector, a hypothesis even less plausible than the first given that the next election is the overwhelming parameter driving the attention of senior public officials.

A third argument might be that the federal government enjoys storage costs lower than those confronting the private sector, particularly because the reported costs of storing oil in the SPR salt domes are lower than those of storage in tanks, floating vessels, underground reservoirs, and the like. This is not a persuasive argument for a government oil stockpile, in that the salt domes could be sold or leased to the private sector for storage purposes, with market competition driving up the price. Official cost comparisons do not include the opportunity costs of such forgone revenues.

A fourth hypothesis might be that the federal government can be predicted over time to allocate the stored oil more efficiently, a premise that is laughable given the wholly ad hoc process characterizing the federal government’s past decisions to sell or trade oil throughout the history of the SPR. Under the reasonable assumption that market forces are vastly more efficient in terms of allocating oil across sectors and over time, the feds should sell call options for the future rights to draw oil out of the SPR, allowing the market to determine such resource allocation.

One argument does make conceptual sense: Because the federal government imposed price and allocation controls during the 1973 and 1979 supply disruptions, the perceived likelihood of such market meddling — “no price gouging or profiteering!” — during a future disruption is greater than zero, so the market has net incentives to store too little oil from the social standpoint. Under this rationale for the SPR, the federal government compensates for the perverse effects of past policies by implementing additional costly policies, the adverse effects of which will lead to more such policies. Such expanding federal power inexorably will be used to subsidize favored constituencies; is there a better description of the historical growth of the federal leviathan?

Note also that market forces yield an equilibrium aggregate stockpile of oil balancing costs and expected benefits. It is far from clear that a government stockpile actually increases total preparedness, as it might lead the private sector to stockpile less. Perhaps the ad hoc nature of federal decisions to sell off some of the SPR oil makes the SPR less relevant in terms of the market equilibrium level of stockpiling, an ironically beneficial effect of federal clumsiness. Or perhaps it yields a decline in aggregate preparedness. Who knows?

It still is asserted commonly that the 1973 Arab OPEC oil “embargo” created the sharp price increases in 1973 (and even 1979) and the market dislocations experienced in the US during that decade. In the wake of the 1970s experience, many have argued that explicit and implicit subsidies for domestic energy production — an example is the Renewable Fuel Standard — would increase energy “independence” and thus insulate the US economy from the effects of international supply disruptions.

Those arguments were and remain largely incorrect. Since there can be only one world market for crude oil, a refusal to sell to a given buyer (i.e., impose a higher price on that buyer only) cannot work, as market forces will reallocate oil so that prices are equal everywhere (adjusting for such minor complications as differential transport costs). In 1973 there was (1) the “embargo” aimed at the US, the Netherlands, and a few others; (2) the production cutback by Arab OPEC; and (3) the US system of price and allocation controls.

The embargo itself had no effect at all: All the targeted nations obtained oil on the same terms as all other buyers, although the transport directions of the global oil trade changed because of the reallocation process. It was the production cutback that raised international prices, and it was the imposition of price and allocation controls that created the queues and other market distortions

Note that there was no embargo in 1979. But there was a production cutback in the wake of the Iranian Revolution, and the US again imposed price and allocation regulations. And, once again, there were queues and market distortions.

Furthermore, however counterintuitive it may seem, the degree of “dependence” on foreign sources of energy is irrelevant, except in the case in which a foreign supplier or foreign power can impose a physical supply restriction, perhaps through a naval blockade or a military threat to ocean transport through, say, a narrow strait. Because the market for crude oil is international in nature, nations that import all their oil (e.g., Japan) pay the same prices as those that import none of their oil (e.g., the UK). Changes in international prices, caused perhaps by supply disruptions, yield price changes in the two classes of economies that are equal, except for such minor factors as differences in exchange-rate effects.

Political machinations have afflicted energy markets for decades. One might think that an administration dedicated generally to “deregulation” would avoid such meddling. At least in the context of the SPR, one would be wrong.

Benjamin Zycher is a resident scholar at the American Enterprise Institute.