U.S. Needs a Strategic Reserve for Green Energy

(Bloomberg Opinion) -- The U.S. Strategic Petroleum Reserve was created to shield the nation from supply disruptions of a commodity essential to its economy. As the world moves toward greener sources of energy, wouldn't the same plan make sense for commodities vital to a smooth transition?

Creating a greener economy is going to require trillions of dollars of investment, and the U.S. government has an interest in setting policies that mitigate the pain of any booms and busts along the way. The Biden administration's use of the SPR to calm an oil market roiled by the war in Ukraine represents a blueprint that could be applied to other industrial materials needed for electric vehicles, batteries or solar panels — and the technology that goes with them.

Using price signals to manage government-controlled stockpiles of crucial metals like copper and nickel is a way that the public sector can work with the private sector to prevent supply hiccups and ensure the country meets its climate goals.

It starts by reviewing the goals of the administration's SPR policy and how it's supposed to work. Because of the war in Ukraine, there's uncertainty about the global supply of oil, or at least, access to that supply. That's led to an increase in prices, which is painful for consumers and much of the economy that's already reeling from accelerating inflation.

So the goal is to reduce prices, which, President Biden said, means providing more supply. Because the government has a stockpile of oil, it's in a position to provide that supply immediately. But because there's a limit, eventually the government's supplies would run out unless there's a private sector response as well. By stating that the proceeds from selling SPR oil will be used to replenish the SPR over time, producers are assured that future demand will materialize, encouraging them to invest in production that may take time to come online.

Oil markets responded the way an engineer of the policy would have hoped. The front-month West Texas Intermediate crude oil contract fell by more than $7 a barrel Thursday as traders priced in the additional near-term supply, which should provide some relief to consumers in the short term. The 12-month contract — April 2023 — fell by just over $1 a barrel since that additional SPR supply is unlikely to be there a year from now — plus the government might be in buying mode by then. The price signal is still there for oil companies deciding whether to increase production in 2023.

If this works for oil, why not apply it to other key industrial commodities? The green economy of the future promises to be one with much less consumption of oil, natural gas and coal, but building it will require a whole host of commodities like copper, nickel and aluminum provided by countries all over the world and vulnerable to potential supply disruptions. And while soaring prices of nickel might not bring about the same in-your-face sticker shock to consumers and voters that $4 a gallon gasoline does, it raises the cost and prolongs the process of transitioning to greener sources of energy.

Even worse would be to have a commodity bust along the way. A significant decline in prices could lead companies to curtail production to stay afloat or maintain profitability. Even after a recovery it would take time for that production to come back online — exactly the sort of dynamic the oil industry is experiencing today.

The closest program like this that exists today is the National Defense Stockpile, which sits underneath the Department of Defense. But it was designed mostly with the military in mind and was not intended to insulate industry from supply shocks. The total value of its holdings today is less than $1 billion, woefully inadequate for the task at hand.

Now that the government has shown it is willing to be nimble in its use of the SPR to smooth out price volatility and ensure sufficient supply for the economy, it can do the same in other commodity markets seen as fundamental to the green economy.

It could announce that when prices fall below a certain level the government will build stockpiles. Even if there's a recession in 2024, we're going to need the copper and nickel eventually, so it wouldn't hurt to have a secure supply on hand. This would also bolster prices and help keep production going during a transitory rough patch in the economy.

Then, if there was a supply disruption or something else that made prices soar, the government could release supplies from its reserve to help stabilize the market.

Strategic reserves stand to play an even more essential role in a world where the future of oil consumption and production is murky, and where many other kinds of commodities will be key to building and maintaining the new economy.

More From Other Writers at Bloomberg Opinion:

America's Oil Reserve Weapon Risks Misfiring: David Fickling
Nickel Market Will Be Broken Even if LME's Fixed: David Fickling
The City of London Is the Wild West of Metals: Javier Blas

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Conor Sen is a Bloomberg Opinion columnist and the founder of Peachtree Creek Investments. He's been a contributor to the Atlantic and Business Insider and resides in Atlanta.