In an interview Tuesday, Khanna praised the Biden administration’s big sales of oil, which shaved off the highs, as well as the administration’s stated goal of buying back oil to replenish the reserve at prices of $67 to $72 a barrel. The administration is hoping that promising to buy oil in that price range will help set a floor under the price of crude, giving producers the confidence that drilling for more oil will pay off.
“I think President Biden had the guts to go against the past 40 years of worshiping unfettered free markets,” Khanna said.
Then again, you can imagine how this could go wrong. If oil goes very high and stays there, Biden or some future president could drain the Strategic Petroleum Reserve dry trying to lower the price. (A pilot program to start replenishing the reserve failed recently when no producers wanted to sell oil at a price the government was willing to pay.)
Hockett told me he believes that the government can manage to sell high and buy low — balancing the market and making a profit — by using statistical analysis to distinguish between speculative spikes and underlying price trends based on supply and demand. That’s plausible, if not certain. There are lots of times when it’s pretty obvious that a market is overbought or oversold, but no private player has the deep pockets to fight the crowd. The government, in contrast, is the ultimate deep-pocketed investor.
Politics are harder to deal with. It’s hard not to think that Biden sold oil to reduce gas prices last year at least in part to boost Democrats’ chances in the midterm elections. Even if it’s not true, the impression is unshakable. Hockett told me that one answer might be to give the job of buying and selling commodity derivatives such as futures and options to the Federal Reserve, which is relatively insulated from politics. Khanna, though, said; “I don’t know if you want to empower the Fed. You want some democratic accountability.”
Kevin Book, a managing director at ClearView Energy Partners in Washington, D.C., said the oil industry is divided over the Strategic Petroleum Reserve. Some small and fast-moving players don’t like releases from the reserve because the releases snatch away the opportunity for people with oil to make profits from high prices, while some big players appreciate having access to crude when commercial supplies are disrupted, he said.
Book said that if the government became a day-to-day market player, constantly suppressing volatility of prices through its purchases and sales, some of the private market participants who provide that function today would drop out, and private inventories of oil that are expensive to maintain might shrink. “The question for the government is, how do you play this role without inadvertently causing the thing you’re trying to prevent?” he said. When I asked Hockett about this, he emailed back that the people Book was referring to are speculators who don’t calm volatility; they amplify it.
