THE BLOG

The Strategic Petroleum Reserve Follow Up

11/30/2007 09:04 am ET | Updated May 25, 2011

Since yesterday's pipeline explosion at Clearbrook Minnesota and the $4 spurt in the price of oil to $95.17 per barrel (see "Time To Tap The Strategic Petroleum Reserve as Pipeline Cuts U.S. Supplies" 11.20.07) the price of oil has retreated by some $6 to a level under $90/bbl for the first time in over a month.

Two significant changes took place. First, the pipeline operator of the largest Canadian oil pipeline to the United States advised that repairs, first reported as potentially problematic, were underway, that oil had restarted flowing, and the pipeline would be in full operation within three days.

Second, and significantly, the Department of Energy announced that it was prepared to open the emergency stockpile to compensate for the disruption.

That the price of oil retraced its initial spurt can well be attributed to getting the pipeline back into operation. That the retracement in price went beyond the initial $4 jump can well be attributed to the Department of Energy's response. It was a signal to the market and oil traders that they can no longer rely on temporary disruptions -- real or imagined -- to support their pricing strategies, pushing prices ever higher. Our Strategic Petroleum Reserve stood at the ready to compensate for temporary dislocations.

The Energy Department's actions and the reaction of the marketplace give clear evidence as to how valuable a tool the SPR can be in containing the hysteria of the market and the excesses of the traders. Let us hope the lesson learned is applied steadfastly in the future.