Releasing SPR Oil is a Foolish and Political Move

Releasing SPR Oil is a Foolish and Political Move

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Ordering a release of oil from our Strategic Petroleum Reserve is a classic Obama administration move: temporary, mindless of market forces and politically motivated. It also creates uncertainty – the scythe that best mows down green shoots.

President Obama’s reelection prospects may well rise (and fall) on our country’s economic progress, which has drastically slowed of late. The recovery needs a boost, and since the White House has used up nearly all the tools in its fiscal and monetary tool kit, it needs to get creative. Obama hopes that putting a little extra cash in the nation’s pocketbook will boost consumption, bolster confidence and get the economy rolling.

We have seen this move only twice before – after the 1991 Iraq war and after Hurricane Katrina. In both instances, supply shortages were imminent, and the release of oil was a welcome measure. Today, there is no shortage. Despite the conflict in Libya, which reduced production from that country from some 1.6 million barrels per day to roughly 200,000, supplies are adequate thanks in part to increased output from Saudi Arabia and other OPEC countries.

After an initial run-up in April as traders speculated about the loss of Libyan output, oil prices have declined over the past several weeks. Many analysts now say that April’s price was the market top for the foreseeable future. Thus, the decision to flood markets with 30 million barrels from the U.S. and an additional 30 million from other International Energy Agency countries, was unnecessary.

White House spokesman Jay Carney said the decision was as “a move by the IEA, which is a 28-member organization, in a coordinated way to address a sustained, significant disruption in our oil supply caused by the events in Libya -- more than 140 million barrels of oil… That disruption is as real today as it was several weeks ago." According to the Financial Times, the White House masterminded the decision.

The chief concern in the White House and amongst other IEA nations was that higher oil prices were dampening growth. The pursuit of a stockpile drawdown was given a boost by the recent OPEC meeting, when price hawks led by Iran and Venezuela defeated Saudi Arabia’s effort to raise production quotas to offset the loss of Libyan output. Western nations have since used that as another excuse for releasing reserves. That argument doesn’t wash, since in the aftermath of the meeting Saudi Arabia and other Gulf producers agreed to make up the Libyan shortfall.

Saudi Arabia will not be alone in wondering if the IEA intends to become a regular participant in setting near term oil prices – a role its founders certainly did not envision. Though we can sympathize with the desire to boost economic growth in the west, unpredictable interventions to control prices will likely make markets even more skittish and volatile. Moreover, the long term effect of pushing down prices will be to undermine the natural response to conserve; lower prices will inevitably boost demand. This can’t be a happy outcome.

Oil prices have retreated since the government announced the stockpile release, now just over $90 a barrel in New York trading. Gasoline prices are coming down slightly – just in time for the July 4th weekend, when millions of Americans hit the road. Those holiday-makers may be pleased to pay $3.50 per gallon for gasoline, instead of $4.00, but they may not be so happy to learn that while the western world is dumping supplies to drive prices down, China is still stockpiling. In an exchange that is all too common these days, the short-term gain for our country turns out to be a long-term win for China. That may take some pop out of the July 4th celebrations.

After more than two decades on Wall Street as a top-ranked research analyst, Liz Peek became a columnist and political analyst. Aside from The Fiscal Times, she writes for FoxNews.com, The New York Sun and Women on the Web.