SPR — One of the Last Arrows in the Economic Quiver and a Temporary One

Today, the Department of Energy along with its international counterpart the IEA announced the release of 60 million barrels of oil onto world oil markets, sending oil prices down roughly 5% as of this writing.  Oil prices have been declining for several weeks.  The release is more likely in response to overall macroeconomic concerns indicated by poor recent employment numbers, inflation data, the Greece situation, and revised downward growth forecasts.  With few macroeconomic tools at its disposal — no apparent QE3, no fiscal stimulus given debt levels and interest rates at zero — the administration resorted to market manipulation to reduce the price of energy to consumers.

While some are questioning the move’s timing, a look at historical crude prices reveals that crude prices tend to peak later in the summer and this may help forestall a second run-up this summer.  However, only a sustained release over a number of months will keep prices depressed for any length of time.  The question is whether the Obama Administration and the IEA are prepared to release additional supplies over a number of months as the contracts roll over through the remainder of the summer.  If they do not, the rebound effect may be to push prices higher, quicker.  Whether its large institutional buyers or governments that enter or exit markets, they do little to impact the long-term of price of the commodity.  Instead, they cause wild swings in the market, making the highs higher and the lows lower.

The long-term price of oil could best be impacted by an energy policy that promotes the development of additional domestic resources through expanded offshore drilling, additional development of natural gas, and the development of new technologies to safely and cleanly bring those resources to the market.