Investor's Business Daily, December 13, 2007

The Bush administration, with support from the Energy Department, is building up the Strategic Petroleum Reserve at a rate of some 50,000 barrels a day. Sen. Hillary Clinton and other critics want the administration to reverse this buildup. A better response would be to take the government's current stockpile of 700 million barrels and sell it off into private hands.

That would likely net at least $56 billion that could be used for tax relief, argues David Henderson, a fellow at the Hoover Institution. The move would also push down the world price of oil, helping American consumers far more than the government's current policy of, as Henderson wrote, "stupidly buying $90 oil to fill the SPR"

To many Americans, the proposal to raise money by selling the SPR may sound a bit like saving money on premiums by canceling a life-insurance policy.

The SPR was authorized in 1975 in response to the OPEC embargo. Its purpose is to provide an extra cushion in the event of another import disruption. The SPR currently contains about two months' worth of net oil imports for the United States.

For these reasons, many consider the SPR a sensible precaution, especially under current conditions and high prices. Yet this type of thinking overlooks the market's ability to anticipate future supply needs.

We don't rely on the federal government to plant trees for Christmas or raise turkeys for Thanksgiving, and we don't need the feds to maintain oil reserves in the event of an embargo. So long as the government lets market prices do their job, professional investors - not politicians - have the correct incentives for balancing the benefits of present consumption vs. possible future shortages.

Moreover, the behavior of speculators influences the oil market to lead everyone else to react in the proper way as events unfold. To see how all this works, suppose there were no government-run SPR and that tensions with Iran suddenly escalated. Analysts would forecast huge spikes in the spot price of oil in the event of military strikes.

Depending on the likelihood of this happening, prices on oil futures as well as more exotic derivatives would constantly adjust with every development in the standoff. Investment banks issuing call option contracts would hedge themselves by buying oil futures, raising the"futures price" of oil. This in turn would cause oil producers to slow current output, as they devoted more of their reserves to futures contracts rather than the spot market.

At the same time, those most pessimistic about the geopolitical future would literally stockpile barrels of oil, anticipating massive price spikes if and when oil from the Middle East stopped flowing.

All of these factors would contribute to a jump in the current spot price of oil, leading consumers to economize on current use. In short, everyone would behave exactly as we would want them to.

For those unfamiliar with commodity markets, it may seem incredibly risky to entrust speculators with forecasting relative scarcities and allocating oil stocks for future needs.Yet the market does a fine job coordinating complex activities in other arenas, such as food.

The institution of private property, with its floating price system, ensures that enough tomatoes, eggs, milk and thousands of other perishable items get delivered to the proper locations all across the country and around the world, on a daily basis. We don't rely on the federal government to plant trees for Christmas or raise turkeys for Thanksgiving, and we don't need the feds to maintain oil reserves in the event of an embargo.

Experts in Washington, D.C., had to give orders controlling this flow of goods, most of humanity would face starvation, as they do in the command economy of North Korea. Many economists warn of government monopoly health care. They should also question the desirability of socialized oil reserves, and things are no different when it comes to ensuring emergency stockpiles. There is nothing magical about government officials.

Private analysts and professional investors - with their own money on the line - would do a much better job forecasting possible supply interruptions. So long as the government stays out of the way, and doesn't threaten "windfall profits taxes" on those who prepare for another OPEC embargo, the feds don't need to take on yet another expensive job they will inevitably bungle.