Oil reserve release is pure politics not economics and will raise prices
Posted on 24 June 2011 with 3 comments from readers
Oil prices have been falling for the past two months. The futility of yesterday’s release of 60 million barrels over one month from the strategic oil reserve is thus exposed as a measure mainly designed to shore up the weakening re-election prospects of US President Barack Obama and is not necessary to lower oil prices.
Whether this is a good use of reserves intended to safeguard the oil consuming nations in periods of real emergency is for the voters to decide. If gas prices fall a little as a consequence for a few months, or a little more than they would have done anyhow, then perhaps they will be grateful.
Government manipulation
Governments in all countries tend to try to interfere with supply and price levels during times of high monetary inflation. Perhaps they ought to learn not to print so much money and take some lessons in economics: inflation is always a monetary phenomenon with too much money chasing too few goods.
The oil price is an example. US crude consumption is actually 10 per cent lower than a year ago and demand at its lowest for two years. And prices have fallen sharply from a peak in April.
But if the demand has fallen so much you do have to wonder why the price is so high if the supply is still there. And yes it is, Saudi Arabia has more than compensated for lost Libyan oil whatever the other Opec members have or have not done.
Money printing
The oil price is up because the Federal Reserve has been printing money since the global financial crisis struck almost three years ago. Ironically the Fed ends its QE2 money printing program this month and perhaps it is the anticipation of the end to this stimulus that has been bringing oil prices down for the past two months.
What happens next will be the revenge of economic forces over political meddling. The oil price will end up going much higher than it would have done left to itself as the strategic reserve is a finite stock of oil, and once used up will have to be replaced, creating new demand for oil and pushing up prices.
All politicians can do when they interfere in price mechanisms is achieve temporary relief at long-term cost, and the cost later will be even higher oil prices and a worse economy as a consequence. That may work for them, of course, as their re-election will be done by then.
3 Comments posted by readers:
I cannot understand the thinking behind this. To me it is counter-intuitive. In fact much of what the US does seems counter intuitive. In the 70’s they sold off vast portions of thier gold reserves (and have not allowed an audit since to see how much if any is left today), then started to pick fights abroad (Vietnam being the key to the gold sell off) and interfere in other nations conflicts. In the 80’s they sold off thier ’strategic reserves’ of silver (and esculated thier global ambitions, even taking on the Soviets in Afghanistan with thier proxy Taliban). In the 90’s food stockpiles and ‘prepardness facilities (nuclear bunkers, civil distribution infrastructure, etc) was run down and sold off, at the same time as NATO was expanded. Now in the 00’s we see them selling off thier oil reserves at a time of great uncertainty.
Add to all this the constant debasement of the US dollar and the decades long shutting down of manufacturing capacity, and anyone can almost be forgiven for thinking that there is a plan to implode the US. I don’t believe that there is a ‘plan’ but they are certainly doing a good job of destroying themselves from what I have seen.
Logic…of course it has logic and this is psychology. It is a stimulus in an economy running out of options for more stimulus. Gas prices at the pump are one of the biggest barriers to people feeling good about spending money. I don’t understand why others don’t understand this. Of course, higher oil prices are necessary in the future for alternative energy sources to come on-line, albeit Canadian tar sand oil or electric cars. But right now, the means to an end is the oil reserve.
Must not forget what what will happen when all of this dumped oil is bought back, either immediately to take advantage of the artificially lowered price, or later when OPEC have compensated and prices go up again. Either way this is a very short term and short sighted approach to a political issue. They have taken thier shot and prices can now only go one way – up.
The option of invading countries to seize oil and gold reserves is now almost completly off the table, Iraq was a massive failure, and the ’soft’ target of Libya has now turned into an expensive and protracted mess, which if it continues for much longer, will backfire badly.
The US and thier allies will soon have to pay full market price for oil.
Oil prices will go up and continue to go up – it is a finite resource being chased by more and more countries in ever greater quantities.
The dumping of strategic oil reserves today will be compared to the British dumping half of thier gold reserves a couple of years ago – short sighted, politically motivated, of little immediate value, and certainly detramental in the long term.