Wednesday, June 29, 2011

Why Is Obama Releasing Strategic Oil Reserves Now?

It's a question I've wanted to tackle for a week or so now, but other topics have overshadowed until now.  President Obama has decided to release some of the strategic petroleum reserves at a time when a) there is no actual threat to oil supply (note: high costs aren't a threat to supply) and b) when the price per barrel has been dropping.  As a matter of fact, the Financial Forecast Center predicts crude will drop by more than 30% in the next six months. (1)

No, releasing 30 million barrels is NOT going to cause that drop.  It's not enough to make a difference for more than a few weeks.  What is causing the drop is a couple of things:  One, the economy is tanking.  The stock market has begun to trail off, and oil is traded on the stock market.  Two, over the past few months, between the House voting to repeal Obama's moratorium on deep water drilling and the mere promise of issuing more permits has caused the "evil" oil speculators to speculate the price down rather than up.  It's basic supply and demand. 

When supply is expected to be lower, businesses go into protective mode and begin to prepare to pay higher prices, selling their product at a higher rate to compensate for expected future costs of doing business.  When supply is expected to be higher, businesses start trying to undercut their competition and price wars begin which leads to reduced prices.  Businesses get off defense (finding ways to maintain their current market share) and go on offense (finding ways to provide their products at a lower price than their competitor to gain market share by either taking customers from their competitors or growing the market). 

So why is Obama choosing right now to release the oil reserves?  It's not needed...the benefit sought (prices dropping) has already started to happen without the release.  Besides, since our country consumes about 20 million barrels of oil a day, it's only releasing enough supply to cover our needs for a day and a half. Why is Obama doing this?

The answer is I believe he is playing politics and preying on the fact that the average American doesn't have a clue about how economics work to say "Look what I did, I released strategic oil reserves and the price dropped.  Vote for me."  Mark my words, this will happen.  Obama will try to claim credit for what market forces are doing through the expectations of higher supply in the future thanks to increased deep water drilling and by the fact that the entire stock market is dropping, oil included.

This is Obama's modus operandi.  He enacts something that has no effect on anything (see releasing oil reserves) or makes a super easy decision and somebody else does all the work (see killing Bin Laden) and then he trumpets his own success.  Mark my words on two things: 1) Obama's releasing 1 1/2 days worth of oil will have zero effect on prices and 2) Obama and the Drive-By Media will claim Obama deserves credit for falling prices.


(1) Crude Oil Price Forecast

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