Steve Hanke has a long article at Cato explaining the link between the value of the dollar and the price of commodities. Although I don’t much like his explanation, he concludes that the effect of the dollar is signficant. The discussion about the role of the dollar in determining commodity prices is not the part of the article I found interesting though. The last part of the article is devoted to a plan he has devised to make better use of the Strategic Petroleum Reserve:

What should be done with the hoard of crude oil in the SPR? It’s time to remove the SPR’s “fill” and “release” rules from the grip of politics. Market-based release rules would transform the SPR into an oil bank. It would provide the country with a huge precautionary inventory of oil, generate revenue to defray some of the government’s stockpiling costs, smooth out crude oil price fluctuations, and push down spot prices relative to prices for oil to be delivered in the future. It would also force the government to “buy-low” (when crude oil is plentiful) and “sell-high” (when crude is scarce).

How would the oil bank work? To implement a “sell-high” release rule, the government should sell out of the money covered call options on the SPR stockpile. It might, say, sell December 2008 call options with a strike price of $150 a barrel. If the price surged above that level, the option buyer would exercise the option and take delivery of crude oil from the government’s stockpile. If the price never reached $150, the option would expire worthless and no crude oil would be released.

To implement a “buy-low” fill rule, the government should sell out of the money put options.5 It might, say, sell December 2008 put options at $70 a barrel. If the price fell below $70, the option buyer would exercise the option and sell crude to the government for delivery to the SPR.

If we want lower oil prices, we can obtain them immediately by replacing politically-based fill and release rules for the SPR with market-based rules.

It’s a great idea that would generate income and also regulate the quantity of oil in the reserve more efficiently. I have no hope that it will be implemented; it makes too much sense.

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