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June 23rd, 2011

White House to Tap Strategic Oil Reserves in Shift from Precedent

By Kent Harrington | Comments (4)
The Obama administration announced that it planned to release 30 million barrels of oil from the Strategic Petroleum Reserve as part of an effort coordinated with the International Energy Agency to drive down high oil prices and to revive weakening economies in some of the world's largest industrialized countries. This is only the third time this action has been taken, and the first not directly related to a large supply disruption from either war or environmental disaster.

Markets have done a quick about-face

The oil will be released over the next 30 days, according to Energy Secretary Steven Chu, representing half of the 60 million barrels that nations in the IEA plan to bring to the oil market. The reserves should start flooding the market by the end of next week, but the announcement's effects are already being felt. Formerly rising, the oil markets have done a quick about-face. Neela Banerjee of the Los Angeles Times:
"We are taking this action in response to the ongoing loss of crude oil due to supply disruptions in Libya and other countries and their impact on the global economic recovery," Chu said. Fighting in Libya has caused a loss of about 1.5 million barrels of oil per day from global markets. Despite the absence of Libyan oil, there is no shortage of oil in the world. But nervousness about unrest spreading to other Arab oil producers, speculative investment in the oil markets and the revival of the Chinese and Indian economies have pushed crude prices to painful levels.
Forbes' Christoper Helman added:
"Crude oil prices and shares of oil companies plunged on the news, with Brent crude down more than $6 to $107 per barrel and West Texas Intermediate off $5 to $90... The timing of this move comes just days ahead of the end of the Federal Reserve’s second quantitative easing program... Knocking $20 a barrel off oil prices would reduce America’s annual oil spend by some $150 billion.

The IEA traditionally opposed using reserves to manage prices

This is only the third time in its history the agency has called on member countries to make a release. Most recently, oil was released in 2005 after Hurricane Katrina severely damaged oil infrastructure in the Gulf of Mexico. The first release occurred after Iraq’s invasion of Kuwait in the early '90s. The IEA has traditionally opposed using reserves to manage price rises, fearing that releasing oil to counteract high prices would add an additional source of speculation by interfering with market signals. According to Reuters' John Kemp:
The suspicion is that the decision to order the release reflects a change of personnel and philosophy—particularly at the White House. President George W. Bush and his energy advisers took a strongly pro-market orientation... President Barack Obama appears much more inclined to intervene. The president has already made clear he believes speculators are to blame for exacerbating the recent price rise...Gyrations in oil prices (such as the sudden drop on May 5 and equally rapid recovery) have not helped the cause of those who insist prices are driven by fundamentals. Across the federal government, and in other capitals, there has been a marked loss of faith in the ability of markets to price assets correctly in the aftermath of the 2008 financial crisis, and a new willingness to intervene—for example, the Federal Reserve's quantitative easing programme. Intervention that was once unthinkable now has more supporters.
The coordinated nature of this move points to ample planning. Last week, Saudi Arabia's decision to go outside OPEC and increase production happened after secret talks with the Obama administration.

Should Obama let market forces dictate the price of oil?

Photo: Barack Obama--Elizabeth Cromwell, Wikicommons Photo: White House-- Ad Meskens, Wikicommons Photo: Hurricane Katrina-- US Navy, Wikicommons Photo: Oil rigs--Patroklos32, Wikicommons Photo: Off shore oil rig-- Nandu Chitnis, Wikicommons
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4 Responses to “White House to Tap Strategic Oil Reserves in Shift from Precedent”

  1. Robert S says:

    The President may be blaming the speculators, but this action has essentially the same effect. How is buying oil because you think it will be more valuable in the future different or worse than using emergency reserves to influence the price. A release for the short-term emergency effect of Katrina is defensible. Using the reserves to combat real long-term supply/demand factors (steady production vs increased Asian demand) is short sighted at best and irresponsible use of emergency funds at worst. After the world has spend a few years climbing out of hole that was caused by spending borrowed money how can spending borrowed oil be considered a sound energy policy?

    Some say that this is a small amount of the reserves and is not that drastic of a move, but it is for the precedent that it sets. And it is a small amount of the global consumption, too small to have a significant impact. I think the price moves that have been observed are emotional responses, not factual responses. Effects from the administration's reverse-speculation.

    • harrington.kent says:

      I agree it's a very bad precedent, but… he might be between a rock and a hard spot.

      I think Obama's 'speculator" defense is just a cover. He's just cloaking himself in a tried-and-true narrative because the main stream media loves working by rote. For better or worse, I think he's very seriously worried about the global economy: the price of oil was moving toward the danger zone, American productivity is up but hiring is worryingly flat, housing is still dragging down our economy, Europe can't come to terms with the severity of the Greek financial crisis, England's economy is still a mess, Fukushima just threw a huge monkey wrench into everything, the Fed has nowhere to go, analysts are starting to downgrade the US growth rate, Nouriel Roubini is starting to make growling noises again, US consumers are still tapped out, and congress is broken… If that were a poker hand, I'd get up from the table.

      I think Obama is a fairly reluctant non-ideological interventionist, pushing Saudis on the down low to up their output in a Joseph-Stiglitz-broken-market kind of way. After all, as an example, he didn't nationalize the banks, which many liberals thought absolutely necessary. He's into "pragmatic" workarounds.

      He's definitely using the military and industry to help drive down renewables–biofuels are a perfect example. I read your comment about the two commercial flights to the Paris Air Show but don't forget that the Air Force's Thunderbirds (symbolic) and the recently certified Globemaster cargo ship are also flying on a camolina biofuel blend and helping the Montana economy. Just before the air show, Virgin American put in a huge order for GE's new hyper-efficient jet engine. You've also noticed all the ipo activity in the biofuel sector. Solazyme!

      Then you hear about all of the DOE grants (Billions) awarded to industry (for huge solar projects or 1336, a startup which might be able to reduce the cost of silicon chips), He's trying to create a public/private synergy– think A123 Lithium-ion batteries, part of a calculatedly wasteful shotgun approach, to attack fossil fuels while ultimately boosting the US manufacturing sector.

      You probably noticed that the TVA just announced a deal with Babcock & Wilcox for a possible order for small, modular reactors– he's even trying to kickstart American nuclear. At the same time, Google, GE and Total are all making big investments in solar manufacturing and residential installation.

    • harrington.kent says:

      Just adding another thought.

      Obama is also using this politically. Since his election, the Republican strategy of constant obstruction has tried to make him into a 2nd Jimmy Carter– ineffectual and impotent. This has worked with Obama's help, since he rarely gets out front and publicly leads on issues. His apparent quiescence feeds this public perception. This has helped to up consumer fears. Releasing the oil was an attempt to give the public a different image: an active President and effective government. Both are the antithesis desired by the current senate and house republicans. Also it was a slap at two governments, Iran and Venezuala. Both countries have such inefficient economies that that they really need the high prices. Also, this wasn't as effective as the Stuxnet virus, but it was just as symbolic a slap.

      • Robert S says:

        You bring up a lot of talking points. I agree that he is in a tough spot…a lot of people are. But my dilemma is when do applying short term fixes prolong the real problem and prevent the real solution from taking hold? The moves in the banking system have prevented a true bottom, in my opinion. But there is an argument that waiting for the true bottom would be worse. That is where I think relating this oil move to an energy policy is different. Even if it does what it is supposed to, it is temporary and doesn't buy that much time. And it still isn't an emergency, mostly regular market influences. To use it as a slap to these countries is petty.

        I agree with some of the other energy moves. Using the government largesse to drive biofuel development is effective, provided it finds a sustainable solution (compared to corn-ethanol). Some of the other electric topics you brought up, I agree it is a shotgun approach. It might be a misguided attempt to bolster US manufacturing. But this is relatively small change on the grand scheme and there is a lot of unknown about the direction we need to go with batteries, electric energy, and the grid. Trying to spur innovation could pay dividends down the road in unintended ways.

        Many of Obama's most successful have been made possible by his ability to carefully reconsider positions and change his mind. This does make him appear slow to decide and maybe behind the current events. But many of his positions are evolving – maybe even reluctantly – but I don't think that is a particularly bad thing. A lot of these issues are complicated and have long-term implications. He is at risk of being compared to Carter (who put solar panels on the White House as part of his energy policy), there are a lot of similarities. The big difference that I see is that Obama is more of a doer, he understands that you sometimes need to move forward even if the perfect solution is not ready yet.

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