Publications: Notes at the Margin

Crude Oil Buffer Stocks/Nonexistent Product Buffer Stocks (October 31, 2022)


Economists have struggled for decades to stabilize commodity markets. At the Bretton Woods Conference in 1944, John Maynard Keynes pushed the Allies to create three international institutions: an establishment to monitor exchange rates, a global bank, and an organization to regulate commodity market prices. The first two goals became a reality as the International Monetary Fund and the International Bank for Reconstruction and Development, which became the World Bank. The commodity price stabilization idea failed.


The desire to keep commodity prices from fluctuating wildly was not new in 1944. McNicol notes that several stabilization schemes were tried in the 1930s and that commodity prices were an active government concern at the end of World War II.[i] He adds that during the war, Keynes even sent a memorandum to the British treasury expressing his concern over “meaningless short-period price swings” and proposing the use of buffer stocks to moderate price ups and downs.


Keynes wanted to create an international organization that would review schemes for managing the price gyrations of individual markets, suggesting an IMF-like clearing union or bank financed by large nations. His idea was not adopted, although hundreds of papers and books on the issue were published. The Theory of Commodity Price Stabilization[ii], released in 1981, probably marked the peak interest in buffer stocks, although research on them continues at the World Bank today. This literature focuses primarily on the impact price cycles have on commodity-producing countries, especially nations that rely on a single crop, good, or resource.


Mostly before 1980, various commodity agreements to stabilize the prices of rubber, coffee, and other commodities were introduced and operated for a time. Eckbo summarizes the success and failure of many of these in The Future of World Oil.[iii] The International Tin Council, created to help control tin prices, may have been the last global effort and is certainly the most famous one. Its collapse in the mid-80s made news around the world.


Following the 1973 Arab oil embargo, the OECD nations created the International Energy Agency. As part of their agreement, the member countries built large buffer stocks of crude oil and smaller stocks of petroleum products. The initial idea was to use the inventories as buffer stocks to stabilize prices. (This author was one of the concept designers and worked with economic policy officials from the United States and other nations to make the plan feasible.)


Unfortunately, the energy departments of the major industrialized nations seized control of the strategic stocks shortly after the storage facilities were built. Regulatory capture followed.[1] Simultaneously, the oil industry convinced government agencies that strategic reserves should only be used during “shortages,” not as a price management tool.


No one bothered to explain how shortages could occur in a market with no price controls, and everyone ignored this policy inconsistency until Joe Biden became president of the United States. Spurred by the energy price impact of Russia’s invasion of Ukraine, his administration has employed the US Strategic Petroleum Reserve and the reserves of other IEA countries as originally intended: for market stabilization.


The use of these government-held stocks to moderate price fluctuations has not pleased the ministers of oil-exporting nations, who have seen their revenues cut by between $24 and $30 per barrel for the last seven months. Their public response has not surprised anyone. The continued discipline of consuming governments in response to producer and oil industry complaints, on the other hand, has been unusual.

[1] Regulatory capture is the process by which companies and industries regulated by a government agency gain control of the agency and its decision-making. See George J. Stigler, “The Theory of Economic Regulation,” The Bell Journal of Economics and Management Science 2, No. 1 (Spring 1971), pp. 3-21 [].

[i] David McNicol, Commodity Agreements and Price Stabilization: A Policy Analysis (Lexington, Mass.: Lexington Books, 1978) [], p. 5.

[ii] David M.G. Newbery and Joseph E. Stiglitz, The Theory of Commodity Price Stabilization: A Study in the Economics of Risk (Oxford, England: Oxford University Press, 1981).

[iii] Paul Leo Eckbo, The Future of World Oil (Lexington, Mass.: Ballinger Publishing, 1976).


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