Bad Precedent, Bad Politics

Market manipulation for political purposes is never a good thing and in this case is likely to have unintended consequences greater than the intended ones. If this sounds cynical, the Obama Administration has provided reasons for cynicism.

So, let’s get this straight. The conflict in Libya has been underway since February and the Obama Administration is just deciding that the loss of 1.5 million barrels a day is a problem. Why wasn’t it a problem sooner. The Secretary of Energy claims that the release is to “relieve pressure on oil markets”. Since prices were declining before the announcement, you have to ask, what pressure? And, to make matters worse, this decision came shortly after the Saudi’s pledged to increase their production. Strained relations won’t get any better from this decision.

Libyan oil is sweet–low sulfur– crude that is used primarily by european refineries. Nigeria is also a source of sweet crude and the problems there could exacerbate the loss of Libyan crude but all of that is primarily a european problem; not a US or global one. Is the oil being dumped on the market low sulfur sweet crude? If it isn’t, how does it compensate for the loss of Libyan crude?

Clearly, there are more questions than there are answers!

The recent decline in crude prices is a sign that recovery from the recent and very severe recession was faltering both here and abroad. Politicians are confronted with the possibility of a double dip and high oil prices and on both sides of the Atlantic have been stumbling from using one failed policy tool to another. It looks like the tool box, almost empty, had one more tool–2 million barrels a day for the next 30 days. What happens after that?

Fear and raw politics are most likely the motivators for the Administration’s action. After two years of getting the high energy prices it wanted, the Obama Administration finally woke up to the fact that they were hindering economic growth and damaging the President’s re-election prospects.

Since taking office, the President has done nothing to encourage domestic energy production or any other energy related actions which would have sent a message that he understood that abundant, affordable energy was a key to economic growth. The Administration scoffed at the notion that more domestic energy would have any affect on crude prices which are set in the global market place. In releasingSPR oil, he is doing the same thing that increased production would do and now claiming that it will have a positive affect. Talk about trying to have it both ways!

The price of crude has been high because of a risk premium associated with unrest in the Middle East and two wars and a belief that investing in oil was better than investing in companies. The latter is the speculation effect.

There is little that can be done about the risk premium in the short run. On the other hand, sound economic policies that restore consumer confidence and encourage business to invest would lead to money shifting from commodities to equities. And, a sound energy policy which focused on increased domestic supplies would send a signal that the US was committed to increasing its production. This would change expectations and futures prices. Renewed leasing in the Gulf of Mexico could lift production several hundred barrels a day in the near term and leasing in Alaska and its coastal waters could lead to an increase of upwards of 2 million barrels a day by the end of this decade.

Whether we import more or less foreign oil is a policy issue; not a geological one. Increasing domestic production should take precedence over periodic politically driven releases from the SPR.

Originally published by the National Journal athttp://energy.nationaljournal.com/2011/06/tapping-oil-reserves-what-prec.php#2017959

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