Friday?s WSJ online has a short piece quoting Daniel Yergin counseling against tapping the Strategic Petroleum Reserve in response to Mideast turmoil. Yergin argues that it is desirable to keep the stockpile untouched as a hedge against the possibility of worse disruptions in the future. Insofar as commercial storage is concerned, economic theory highlights two factors that are relevant in determining the optimal timing of adding to or drawing from inventories. My forthcoming book goes into these factors in detail.
The first is that it is optimal to draw down on storage in response to adverse supply shocks that are expected to be transitory. This means that current supply is below expected future supply, making it less desirable to hold inventories to meet future consumption needs. Well-functioning markets move things from where they are relatively abundant to where they are relatively scarce. A temporary supply shortfall means that the present
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