Friday, June 24, 2011
Obama's Oily Desperation
Obama's Oily Desperation
By Ross Kaminsky on 6.24.11 @ 6:09AM
In a move that has everyone from oil analysts to traders to petroleum producers scratching their heads, the Obama Administration announced on Thursday morning that the U.S. along with over two dozen other nations will release 60 million barrels of oil from emergency oil stock piles. Half of the total release, or 30 million barrels, will come from the U.S. Strategic Petroleum Reserve.
News of the release, which will be 2 million barrels per day for 30 days beginning about a week from now, hit oil prices in futures trading. West Texas Intermediate crude oil trading in the U.S., which was already down about $1 on the day, fell more than $3 further to about $91 per barrel. Brent crude, which trades in London, fell almost $7 per barrel
The excuse being used by the Obama Administration and the International Energy Agency for the oil release is that reduced oil exports from Libya are raising energy prices and thus hurting world economies.
However, the Saudis have already said they would increase production to offset losses from Libya -- and they have done so. More importantly, and partly in reaction to the Saudi move, oil prices had fallen almost 20% in about six weeks since peaking near $115 in early May over fear about Libyan and Middle Eastern unrest.
The idea that the federal government needed to knock oil prices down further or faster for economic purposes while oil was already in what would be considered a dramatic sell-off is simply not credible.
More likely is that the Obama Administration is sinking into desperation as its economic policies lengthen and deepen the economic downturn -- just as similar (and one would have therefore thought discredited) policies in the 1930s were substantially responsible for turning a serious recession into the Great Depression.
When Obama's pet Fed Chairman Ben "The" Bernanke, the great printer of money, says he's surprised by the persistent weakness of our barely-recovery, you know those in charge of President Obama's re-election can see their paychecks ending much sooner than they had anticipated when buying their Dupont Circle condos.
The public is realizing that government is, as Reagan said, the problem… government spending specifically so. Republicans now control the House of Representatives, and they realized it even before the public did. Due to both of those political realities, more damaging Keynesian "stimulus" spending is, mercifully, off the table as a policy choice for Obama.
This leaves Obama with very few arrows in his quiver, none of them sharp, and no accurate archer to fire them. His move to release oil from the Strategic Petroleum Reserve is like shooting a dull arrow at a target and hitting the rock next to the target. Not only did you miss, but you've forever ruined the arrow… which wasn't much of a weapon to begin with.
The release is not enough to create any permanent impact on oil prices. It is enough to cost taxpayers barrels of money in the operational costs of releasing (and then replacing) the oil. And it sticks taxpayers with the unnecessary risk of millions more in loss if oil prices go up before the oil is replaced.
But it's even worse than all this.
The Saudis had taken some political risk with their erstwhile friends (not that there really are any friends in that part of the world) by agreeing to raise production more than a million barrels per day to offset any shortfalls due to the Libyan turmoil. By releasing oil from emergency supplies, the U.S. risks having the Saudis cut back to their prior production levels… and stay there, even after the two-month duration of Obama's gambit, burdening us with higher oil prices in mid-summer than we otherwise would have. Obama also leaves the world's largest oil producer thinking that we stabbed them in the back just as they did something helpful to us (even if it was also helpful to them).
July unleaded gasoline futures (golf clap if you know why they're called RBOB futures) fell a similar percentage to oil, dropping more than 13 cents to their lowest closing price in three months. This will be President Obama's first line of rhetorical defense for his premature exudation: "See, I lowered your gas prices." Unfortunately, he may well get away with that among some sections of the population, especially with those who incorrectly give the president credit for the 40-cent drop in gasoline since early May. In that sense, perhaps the timing of Obama's move is clever in a most cynical way -- the only way in which this Administration is ever clever: cause a small drop in gas prices but take credit for a big drop.
As far as convincing the rest of us, here's a prediction for you: Obama will go the populist pandering route by describing his feckless desperation as an effort to bash evil speculators. There are several problems with this, however. First, many of what are called "speculators" are simply investment funds that hold retirement account and pension money and are simply looking for investment diversification. Second, professional speculators who were long will take their one-day beating and get right back into the market, perhaps considering the same calculus mentioned above about Saudi Arabia and thinking that an upward path for oil prices, at least in two months, is an even better bet now than it was before. Third, oil was already down about 20% in less than two months, implying that there are also speculators on the short side; speculators are on both sides of every active market. Fourth, and perhaps most importantly, it's not the government's job to decide which market participants to punish (or aid) -- and to use or risk taxpayer money to mete out such punishment or windfall profits.
In the meantime, it's not just traders and investors but also entrepreneurs who smell Obama's fear. And when this level of sheer economic panic is shown by the government, it further depresses the willingness of America's job creators to take risk to start or expand businesses. After all, the most rational reaction to today's rash policy move is that the administration thinks that the economic situation must be even worse than we had thought… and that the government may do something else as stupid as this in response. Really, is there any way in which a business owner or manager could interpret yesterday's action as positive for more than a few hours or days of lower fuel prices?
The minuscule potential economic benefit from a temporary addition of supply to the oil market will be more than offset by the further retrenching of American business into a defensive cocoon as it aims to wait out the reign of the most economically incompetent president since FDR.
Of all the misguided policies implemented during the Obama Administration, this release of oil from our Strategic Petroleum Reserves is the most puzzling and the most representative of its utter cluelessness about markets, business, and economics. It sends multiple wrong messages. The little that it might accomplish will be temporary. And the longer-term response by markets and businessmen will be more than an equal and opposite reaction.
Posted by Brett at 11:18 AM