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Does drawing down the US Strategic Petroleum Reserve help stabilize oil prices?

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  • Lutz Kilian
  • Xiaoqing Zhou

Abstract

We study the effects of releases from the US Strategic Petroleum Reserve (SPR) within the context of fully specified models of the global oil market that explicitly allow for storage demand as well as unanticipated changes in the SPR. We show that historically SPR policy interventions, defined as sequences of exogenous SPR shocks during selected periods, have helped stabilize the price of oil. Their effect on the price of oil, however, has been modest. For example, the cumulative effect of the SPR releases after the invasion of Kuwait in 1990 was a reduction of $2 per barrel in the real price of oil after 7 months. Whereas emergency drawdowns tend to lower the real price of oil, we find that exchanges tend to raise the real price of oil in the long run. We also provide a detailed analysis of the benefits of the 2018 White House proposal to sell off half of the SPR within the next decade. We show that the expected fiscal benefits of this plan are somewhat higher than the revenue of $16.6 billion dollars projected by the White House.

Suggested Citation

  • Lutz Kilian & Xiaoqing Zhou, 2020. "Does drawing down the US Strategic Petroleum Reserve help stabilize oil prices?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 35(6), pages 673-691, September.
    • Handle: RePEc:wly:japmet:v:35:y:2020:i:6:p:673-691
    DOI: 10.1002/jae.2798
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    1. Kilian, Lutz & Lee, Thomas K., 2014. "Quantifying the speculative component in the real price of oil: The role of global oil inventories," Journal of International Money and Finance, Elsevier, vol. 42(C), pages 71-87.
    2. Ron Alquist & Lutz Kilian, 2010. "What do we learn from the price of crude oil futures?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 25(4), pages 539-573.
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    4. Inoue, Atsushi & Kilian, Lutz, 2013. "Inference on impulse response functions in structural VAR models," Journal of Econometrics, Elsevier, vol. 177(1), pages 1-13.
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    9. Lutz Kilian, 2016. "The Impact of the Shale Oil Revolution on U.S. Oil and Gasoline Prices," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 10(2), pages 185-205.
    10. Juan F. Rubio-Ramírez & Daniel F. Waggoner & Tao Zha, 2010. "Structural Vector Autoregressions: Theory of Identification and Algorithms for Inference," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 77(2), pages 665-696.
    11. Lutz Kilian, 2010. "Explaining Fluctuations in Gasoline Prices: A Joint Model of the Global Crude Oil Market and the U.S. Retail Gasoline Market," The Energy Journal, International Association for Energy Economics, vol. 0(Number 2), pages 87-112.
    12. Richard G. Newell and Brian C. Prest, 2019. "The Unconventional Oil Supply Boom: Aggregate Price Response from Microdata," The Energy Journal, International Association for Energy Economics, vol. 0(Number 3).
    13. Lutz Kilian, 2008. "The Economic Effects of Energy Price Shocks," Journal of Economic Literature, American Economic Association, vol. 46(4), pages 871-909, December.
    14. Lutz Kilian, 2017. "The Impact of the Fracking Boom on Arab Oil Producers," The Energy Journal, International Association for Energy Economics, vol. 0(Number 6).
    15. Newell, Richard G. & Prest, Brian C., 2017. "Informing SPR Policy through Oil Futures and Inventory Dynamics," RFF Working Paper Series 17-19, Resources for the Future.
    16. Lutz Kilian, 2009. "Not All Oil Price Shocks Are Alike: Disentangling Demand and Supply Shocks in the Crude Oil Market," American Economic Review, American Economic Association, vol. 99(3), pages 1053-1069, June.
    17. Lutz Kilian & Robert J. Vigfusson, 2011. "Are the responses of the U.S. economy asymmetric in energy price increases and decreases?," Quantitative Economics, Econometric Society, vol. 2(3), pages 419-453, November.
    18. Soren T. Anderson & Ryan Kellogg & Stephen W. Salant, 2018. "Hotelling under Pressure," Journal of Political Economy, University of Chicago Press, vol. 126(3), pages 984-1026.
    19. Jamie L. Cross & Bao H. Nguyen & Trung Duc Tran, 2020. "The role of precautionary and speculative demand in the global market for crude oil," CAMA Working Papers 2020-34, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    20. Kilian, Lutz & Zhou, Xiaoqing, 2018. "Modeling fluctuations in the global demand for commodities," Journal of International Money and Finance, Elsevier, vol. 88(C), pages 54-78.
    21. Lutz Kilian & Daniel P. Murphy, 2014. "The Role Of Inventories And Speculative Trading In The Global Market For Crude Oil," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 29(3), pages 454-478, April.
    22. Hilde C. Bjørnland & Frode Martin Nordvik & Maximilian Rohrer, 2021. "Supply flexibility in the shale patch: Evidence from North Dakota," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 36(3), pages 273-292, April.
    23. Ben Zeev, Nadav, 2018. "What can we learn about news shocks from the late 1990s and early 2000s boom-bust period?," Journal of Economic Dynamics and Control, Elsevier, vol. 87(C), pages 94-105.
    24. Kilian, Lutz, 2019. "Measuring global real economic activity: Do recent critiques hold up to scrutiny?," Economics Letters, Elsevier, vol. 178(C), pages 106-110.
    25. Ana María Herrera & Sandeep Kumar Rangaraju, 2020. "The effect of oil supply shocks on US economic activity: What have we learned?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 35(2), pages 141-159, March.
    26. Lutz Kilian & Daniel P. Murphy, 2012. "Why Agnostic Sign Restrictions Are Not Enough: Understanding The Dynamics Of Oil Market Var Models," Journal of the European Economic Association, European Economic Association, vol. 10(5), pages 1166-1188, October.
    27. Jonas E. Arias & Juan F. Rubio‐Ramírez & Daniel F. Waggoner, 2018. "Inference Based on Structural Vector Autoregressions Identified With Sign and Zero Restrictions: Theory and Applications," Econometrica, Econometric Society, vol. 86(2), pages 685-720, March.
    28. Xiaoqing Zhou, 2020. "Refining the workhorse oil market model," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 35(1), pages 130-140, January.
    29. Lutz Kilian, 2013. "Structural vector autoregressions," Chapters, in: Nigar Hashimzade & Michael A. Thornton (ed.), Handbook of Research Methods and Applications in Empirical Macroeconomics, chapter 22, pages 515-554, Edward Elgar Publishing.
    30. Kilian,Lutz & Lütkepohl,Helmut, 2018. "Structural Vector Autoregressive Analysis," Cambridge Books, Cambridge University Press, number 9781107196575.
    31. Brian D. Wright & Jeffrey C. Williams, 1982. "The Roles of Public and Private Storage in Managing Oil Import Disruptions," Bell Journal of Economics, The RAND Corporation, vol. 13(2), pages 341-353, Autumn.
    32. Edelstein, Paul & Kilian, Lutz, 2009. "How sensitive are consumer expenditures to retail energy prices?," Journal of Monetary Economics, Elsevier, vol. 56(6), pages 766-779, September.
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    Cited by:

    1. Atsushi Inoue & Lutz Kilian, 2020. "The Role of the Prior in Estimating VAR Models with Sign Restrictions," Working Papers 2030, Federal Reserve Bank of Dallas.
    2. Jamie L. Cross & Bao H. Nguyen & Trung Duc Tran, 2022. "The role of precautionary and speculative demand in the global market for crude oil," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 37(5), pages 882-895, August.
    3. Kilian, Lutz, 2022. "Facts and fiction in oil market modeling," Energy Economics, Elsevier, vol. 110(C).
    4. Inoue, Atsushi & Kilian, Lutz, 2022. "Joint Bayesian inference about impulse responses in VAR models," Journal of Econometrics, Elsevier, vol. 231(2), pages 457-476.
    5. Sophio Togonidze & Evzen Kocenda, 2022. "Macroeconomic Implications of Oil-Price Shocks to Emerging Economies: A Markov Regime-Switching Approach," Working Papers IES 2022/21, Charles University Prague, Faculty of Social Sciences, Institute of Economic Studies, revised Sep 2022.
    6. Grzegorz Przekota & Anna Szczepańska-Przekota, 2022. "Pro-Inflationary Impact of the Oil Market—A Study for Poland," Energies, MDPI, vol. 15(9), pages 1-19, April.
    7. Kilian, Lutz, 2022. "Understanding the estimation of oil demand and oil supply elasticities," Energy Economics, Elsevier, vol. 107(C).
    8. Kilian, Lutz & Zhou, Xiaoqing, 2022. "The impact of rising oil prices on U.S. inflation and inflation expectations in 2020–23," Energy Economics, Elsevier, vol. 113(C).
    9. Shiu‐Sheng Chen, 2023. "A direct approach to Kilian–Lewis style counterfactual analysis in vector autoregression models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 38(7), pages 1068-1076, November.
    10. Raffaella Giacomini & Toru Kitagawa & Matthew Read, 2021. "Identification and Inference Under Narrative Restrictions," Papers 2102.06456, arXiv.org.
    11. Baumeister, Christiane & Hamilton, James D., 2020. "Drawing conclusions from structural vector autoregressions identified on the basis of sign restrictions," Journal of International Money and Finance, Elsevier, vol. 109(C).
    12. Chang, Lei & Mohsin, Muhammad & Gao, Zhennan & Taghizadeh-Hesary, Farhad, 2023. "Asymmetric impact of oil price on current account balance: Evidence from oil importing countries," Energy Economics, Elsevier, vol. 123(C).
    13. Azhgaliyeva, Dina & Kapsalyamova, Zhanna & Mishra, Ranjeeta, 2022. "Oil price shocks and green bonds: An empirical evidence," Energy Economics, Elsevier, vol. 112(C).

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    More about this item

    JEL classification:

    • Q38 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Nonrenewable Resources and Conservation - - - Government Policy (includes OPEC Policy)
    • Q43 - Agricultural and Natural Resource Economics; Environmental and Ecological Economics - - Energy - - - Energy and the Macroeconomy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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