This is the Cato Daily Podcast for Friday, June 24th, 2011. I'm Caleb Brown.

The release of millions of barrels of oil from America's Strategic Petroleum Reserve in the name of

stimulus raises one question. Why do we have a Strategic Petroleum Reserve?

Peter Van Doren, editor of Regulation magazine, offers his thoughts.

Tim Consodon, who's an energy economist who was at Penn State until recently and now

is actually moved to the University of Wyoming because there's an energy boom and they've got some chairs in energy economics out there.

Tim wrote an article for the Energy Journal in 2006 which modeled the world oil market and then

estimated what a 30 million barrel SPR release would have on price.

So it's rare that what a journal does actually matches up with what

policy did. So his estimate was that a 30 million barrel release would have about a 3.5% reduction in world price on crude and given today's prices in the low 90s,

that's somewhere around 7 cents a gallon given my

calculations today. If you took normal short-run elasticities you get a much bigger price reduction and Tim

argues though that that would be an incorrect estimate because what producers do when there's a supply release from inventory

is they reduce their production.

So the initial 1 million barrel a day in effect supply augmentation is actually not a net 1 million barrel

a day supply augmentation because the Saudis in particular reduce their production in response to our inventory release

and other producers reduce their production by not to the extent that the Saudis do but to some extent because in effect

The price is now lower and and they receive less profit for production and so they reduce their supply a bit

So the net effect instead of this kind of 11%

prediction that you would have, you end up with a 3.5

and so you have a slight reduction in world crude oil prices as the result of this release that was announced today.

I think what's odd, once you have a larger historical perspective, we ought to talk about what was the SPR developed for in the

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