Buffer Stocks and Better Futures: A Strategic Resilience Reserve to Reshape Market Stability

The depth and safety of America’s financial and commodities markets is an immense strategic asset, particularly when integrated with physical storage facilities. Benchmark financial contracts with physical storage, such as the West Texas Intermediate (WTI) contract, support liquidity in a key market but also dampen volatility, protecting consumers from painful price spikes. But investing in the storage necessary to protect consumers from the worst shocks is a high hurdle for private investors and is best undertaken by the public sector. The 50-year-old Strategic Petroleum Reserve (SPR) imperfectly serves this function—shielding American families’ budgets while promoting American industrial resilience. But the SPR should be modernized, not only to support an economy that will still likely require oil for decades but also to hasten decarbonization. 

It’s time to reimagine the Strategic Petroleum Reserve as a Strategic Resilience Reserve (SRR)—a successor capable of insulating consumers and producers from the worst effects of market volatility. A well-designed strategic reserve, integrated with modern financial markets and supply chains, could support the development of well-governed, resilient markets for critical commodities. Upstream security drives mid- and downstream capacity. For households, this would mean lower and more stable inflation with fewer supply shocks and shortages and a stable job base in manufacturing. 

China currently dominates production for many critical minerals—over 60 percent of rare earth mineral production in 2023 was in China, and one forecast estimated that 97 percent of mined lithium in Africa would come from Chinese-owned projects.¹ Its supremacy is even more profound in processing—China processes over 35 percent of the world’s nickel, 58 percent of lithium, and 70 percent of cobalt. This gives it extraordinary leverage over the battery supply chain for everything from electric vehicles to drones. A strategic reserve, with storage facilities near production and processing locations in the US and among allied nations, could help break this choke point.² The same logic should apply to any crucial market where supply shocks create outsized economic pain—metals and minerals, refined fuels, liquefied natural gas, and agricultural commodities.

The Strategic Petroleum Reserve was born of a shortage crisis. The Arab OPEC embargo of 1973 precipitated widespread shortages for gasoline across the United States. The US government established the reserve to insulate our energy supply from future shortages. Now, as the world’s top oil producer, the United States must change its focus: protecting consumers from the worst of upside price shocks to support high standards of living and protecting producers from the worst of downside price crashes to protect investment for key inputs necessary for a resilient and vibrant economy. This approach needs to be expanded beyond crude oil to the key commodities necessary for an industrial economy and decarbonization. 

In volatile markets, storage plays the role of a shock absorber—dampening price spikes and staving off price crashes. When that storage is integrated into modern financial markets, it reduces the transaction costs for all market participants to manage risk. The WTI contract, and its associated storage facility in Cushing, Oklahoma, is a good example. In essence, the confluence of storage, extensive physical connectivity, and a standardized, physically delivered contract fosters liquidity and operational flexibility.

Cushing is at the heart of North America’s oil pipeline network, ensuring ready access for producers and traders to move barrels in or out. Because the WTI futures contract requires physical delivery at Cushing, participants can store crude in the storage tanks there when demand softens or prices drop, rather than offloading it immediately at unfavorable rates. This built-in mechanism of deferring sales while awaiting more advantageous market conditions stabilizes spot prices. Moreover, infrastructure connecting Texas production to Cushing facilitates rapid inflows of oil when local prices rise, mitigating excessive price spikes. This framework anchors market expectations, enabling producers, refiners, and financial players to hedge effectively, thereby smoothing short-term imbalances and ideally dampening the kinds of extreme volatility seen in less integrated markets. Obviously, the oil market still has volatility, but prices vary between a range of $40 and $140, a factor of 3x. In less-mature markets, this factor can be as high as 8x, such as in the lithium market, where prices have gone from $5,000/ton to (nearly) $40,000/ton. 

This market infrastructure dampens volatility in most scenarios but suffers from two key deficiencies that harm producers and consumers respectively. First, the cost of building sufficient storage is high and ultimately not worth the significant investment for private market participants. That means that storage capacity, in the worst tail-risk scenarios, is far more limited than necessary to stabilize the market. In March 2020, the onset of COVID-19 and the resulting price war between Russia and Saudi Arabia crashed prices. With no money to serve as the “buyer of last resort” and store crude in the Strategic Petroleum Reserve, investment crashed, setting the stage for future volatility and painful energy price spikes during 2021 and 2022. 

The second failure arises when prices rise precipitously. Again, the lack of sufficient storage means in the worst scenarios, private inventories do not necessarily hold enough product to dramatically reduce prices to more tolerable levels for consumers. If market participants expect prices to increase even further, they have little incentive to sell to the market when the prospect of higher profits in the future is available—especially for commodities with inelastic demand like crude oil. When market participants aren’t willing to relieve price pressure for consumers, the federal government can avert that costly outcome if it has spare inventory available for imminent sale and release. Integrating storage with modern financial markets, particularly for more immature commodity markets necessary for decarbonization like lithium and cobalt, could provide a similarly effective channel for the federal government to limit price volatility in commodities highly relevant to achieving decarbonization goals.

A model for a reimagined Strategic Resilience Reserve is the Federal Reserve, which manages systemic financial risks in the economy. The Fed enhanced its financial stability tool kit after the 2008 financial crisis to improve system resilience and mitigate potential shocks. While not flawless, this combination of supervision, buffer requirements, emergency tools, and global coordination has proven effective during extreme market volatility. 

The Fed employs a broad range of stability tools in two categories: crisis prevention (ex-ante) and crisis mitigation (ex-post). Mitigation tools allow the Fed to inject liquidity into the financial system and purchase assets to restore market function and ease conditions when funding constraints bind and dollars are effectively scarce—akin to purchasing commodities to fill a strategic reserve. The Fed’s ability to intervene directly through market channels via asset purchases and lending is a critical feature of its ex-post interventions. Often, just signaling willingness to intervene suffices to restore stability when market confidence is fragile. Of course, for these interventions to reflect fair give and take, they must be coupled with robust ex-ante regulation and supervision that preventatively reduce the risk of future crises and the need for future interventions. 

A Strategic Resilience Reserve would represent a critical evolution in America’s approach to commodity market stability. By adapting the Federal Reserve’s proven tool kit to physical commodity markets, this reimagined institution would protect consumers from devastating price spikes while shielding producers from ruinous crashes that threaten long-term investment and supply security. As geopolitical tensions rise and the energy transition accelerates, the need for sophisticated market stabilization mechanisms becomes increasingly urgent. That level of sophistication requires both the requisite financial market infrastructure and an effective governance framework to manage and limit key sources of volatility that the private sector is otherwise insufficiently incentivized to insure against. The SRR would serve as a vital shock absorber in our complex commodity markets, ensuring economic stability and strengthening America’s industrial resilience for decades to come.