Monday, June 27, 2011

The Obama Administration and the Price of Oil

The decision to sell 30 million barrels of oil from the Strategic Petroleum Reserve and to convince the other member countries of the International Energy Agency to match this is an attempt to lower the price of oil and the price of gasoline. The timing is somewhat curious, since gasoline prices had already started coming down. However, gasoline prices, which change frequently, are highly visible and perhaps it was felt that there would be an economic and psychological benefit in getting the price down more, as well as a political one.

The Administration's first reaction when oil prices were going up was to blame speculators and announce investigations into nefarious market activity. Every time the price of oil spikes, some politicians will deliver tough talk about speculation, though there is remarkable silence when the price of oil suddenly falls.

Some of the leadership of the CFTC also wanted to get into this act. As I discussed in a prior post, some of the CFTC commissioners, including the Chairman, are keen on imposing position limits on derivatives, including swaps, based on physical commodities, even if there is no evidence of "excessive speculation," however one might define that term.

It seems to have become clear to the Administration that investigating or trying to restrict speculators was not going to do the trick of reducing oil prices. To accomplish that, they would have to do it the old-fashion way by intervening in the cash market for oil, rather than focusing on those who bet on the future price of oil. But they can't release oil from the SPR indefinitely. If the world economy remains in a slump or is hit by another crisis as the ever more worrying European situation suggests that it might, then the price of oil may remain steady or fall unless the oil producing nations reduce production. If those of us who are worried about current economic prospects are pleasantly surprised by stronger global economic growth, then oil prices are likely to rise.

In other words, the recent decision to add to world oil supplies is only a temporary measure. Perhaps more people will take a road trip this summer or fly somewhere if airline ticket prices are not too high because of this decision to attempt to reduce the price of oil and that may marginally benefit the economy.

Finally, if one is serious about addressing climate change issues, keeping the price of oil relatively low over the longer term is not what you want to do. It is inevitable that we are all going to have to become more careful about our energy consumption, both because of climate change concerns and because of increased demand for energy from some of the emerging market countries.

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