The Strategic Petroleum Reserve (SPR) was created in response to the 1975 Arab Oil Embargo and was intended to, “Store petroleum to reduce the adverse economic impact of a major petroleum supply disruption”.
Despite long history of purchases and releases of crude oil, little is known about the effect of the Strategic Petroleum Reserve (SPR) on crude oil prices. Much of the existing literature on the SPR focuses on the optimal purchase and release strategies and does not directly estimate the effect of the SPR on crude prices. It is generally assume a SPR crude oil release during a supply disruption will lower oil prices, but SPR purchases when the oil market is calm will not affect prices. Unsurprisingly, these models show that under optimal management, the benefits of the SPR far outweigh the costs of construction, oil acquisition, and storage. The estimated benefits of the SPR are even higher when the negative macroeconomic effects of oil price spikes are taken into account.
The few empirical estimates of the SPR price effect vary widely. SPR releases are estimated to lower the price of crude oil by 3 to 32 percent, while SPR purchases are estimated to increase the price of crude oil by 0.4 to 32 percent. The lack of consistency among these estimates is evidence that identifying the effect of SPR policy on oil prices is difficult. Some SPR crude oil releases occurred in response to severe oil market supply disruptions while others occurred because oil prices were relatively low and stable.
Isolating the effect of SPR policy is challenging because the policy depends, in part, on the state of the oil market. Changes in the price of oil following an SPR policy action reflects both the policy and market conditions to which the policy is responding. The endogeniety of crude oil supply, crude oil demand, and SPR policy has likely led to the widely varying estimates of the SPR’s effect on the price of oil.
Given these difficulties, Researchers use several structural vector autoregression (VAR) models of the oil market to estimate the effect of SPR policy. Since Kilian structural VAR models have been used to model the global oil markets as following the voluminous monetary policy literature. As a starting point, researcher identify SPR policy effects by restricting the structural shocks through the recursiveness assumption. For example, the exclusion restrictions in this model imply that oil supply and oil demand respond only with a lag to SPR policy shocks. To justify this assumption, the model data typically used in the oil market literature. In this benchmark model, an unanticipated SPR purchase raises the price of oil 1.5 percent over 20 weeks following purchase, but an unanticipated SPR release does not have a statistically significant effect on the price of oil.
Though VAR models in both the oil market and monetary policy literature are identified by assuming recursiveness. Researcher take a different approach and identify policy shocks using information that is external to the VAR model, but correlated with unanticipated policy actions. Following work by Romer and Romer in the year 1989, who use the minutes from Federal Reserve meetings to identify monetary policy actions that were exogenous with respect to market conditions, many research have constructed external instruments to identify structural shocks. In order to identify structural shocks, we must construct two separate instruments to partially identify the effects of SPR purchases and releases in a VAR framework.
First, the SPR purchase schedule as an instrument to identify unanticipated SPR purchases. The purchase schedules were not immediately announced and exemptions from the schedule were rarely granted, which makes the purchase schedule correlated with unanticipated SPR purchases. The schedule was also set well ahead of the delivery window, so the purchase schedule is uncorrelated with other structural shocks at the time of purchase. Using the purchase schedule as an instrument to partially identify the VAR model, It is estimate that SPR purchase shocks cause crude oil prices to rise 6 per cent over 15 weeks following purchase.
Secondly, the crude oil futures data to identify the effect of SPR releases on crude oil prices. In these models, the change in futures prices immediately following a policy announcement is used to estimate the unanticipated component of the policy. For example, an unanticipated SPR release announcement would be immediately followed by a drop in the crude oil futures price, whereas a wholly anticipated SPR release announcement would elicit no response from the crude oil futures market.
Under a variety of empirically plausible identifying assumptions, SPR purchase shocks raise oil prices, but SPR release shocks have no measurable impact on prices. The asymmetric effect of SPR policy is puzzling. Following the growing uncertainty literature, researcher augment the VAR model with an uncertainty variable and policy-uncertainty interaction terms, which allows SPR policy to have time-varying price effects. Researcher find that an unanticipated SPR purchase has no measurable effect on prices when oil market uncertainty is low, while an unanticipated purchase increases the price of oil three percent when oil market uncertainty is high. The price of crude oil is unaffected by SPR release shocks at all levels of oil market uncertainty. These results are robust to using alternate measures of uncertainty based on stock market volatility and policy uncertainty. The asymmetric effect of SPR purchases under uncertainty is consistent with the literature on the value of real options under uncertainty.
The SPR release shocks do not lower oil prices but SPR purchase shocks raise oil prices–is at odds with the academic literature and has a number of implications for SPR management. First, SPR purchases should be avoided during periods of high oil market uncertainty. Though policymakers tend to be interested in filling the reserve when oil markets are volatile, researcher find those purchases have a large, immediate cost and have no measurable effect on prices when the oil is eventually released. Second, crude oil releases from the SPR should not be relied on to lower oil prices. A policymaker facing a spike in oil prices should explore other policy options to lower the price of crude oil.
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