Home > Business & the Economy > Controlling Oil Prices

Controlling Oil Prices

President Obama announced yesterday that he was authorizing the release of 30 million barrels of oil from the Strategic Petroleum Reserve (SPR) over the next 30 days.  The decision was made in coordination with our European allies who also will be releasing an equal amount.

Supply disruptions from the ongoing conflict in Libya were cited as the rationale for the release, but several industry analysts and commenters question this rationale.  The current stockpile of oil and gas hasn’t dramatically decreased since the Libyan conflict began, and most industry analysts believe there are adequate supplies, irrespective of what happens in Libya.  Although oil prices climbed dramatically at the beginning of the conflict, they have dropped nearly 10% over the past few weeks.

Many commentators suspect the real motivation is an attempt to drive potential speculators from the market.  If this was the intent, it seems to be working… at least for the moment.  Yesterday, the market price for oil dropped $5 per barrel, and gasoline futures dropped $0.14 per gallon.

Although we may all profit from lower fuel prices, the long-term cost of this decision may not be worth the short-term benefits.  The effects of this strategy may be short-lived.  By current estimates the world consumes nearly 89 million barrels of oil per day (the U.S. consumes 21 million barrels each day).  Thus, releasing 1-2 million barrels per day isn’t going to have a dramatic effect on long-term  supplies.

If hindering the profits of traders and speculators was a primary motivation, then it’s huge misappropriation of power.  The SPR was created to protect the country against a sudden disruption of oil supply, especially for the military.  Although the SPR has been tapped for non-military uses in the past, it was never intended to be a tool to control market prices.  It’s dangerous for politicians to use a strategic asset to achieve a political or economic result.

In my mind, such actions raise serious questions.

  • Where in the Constitution does the government have the power to manage the price of a particular asset or commodity?
  • Is the government now in the position of trying to make or break a market?
  • Who gets to decide when the price is too high or too low?
  • How does a national asset become a tool to manage a particular market?

I agree that government has a role to enforce free and fair trading practices.  If illegal and unethical trading occurred, then go after the culprits, or pass legislation if rules need to be  changed.  Absent illegal or immoral activities, the government doesn’t have a right to control the market because our political leaders don’t like the result of what is happening.   Government’s attempt to regulate and control market prices sounds a lot like socialism – not free enterprise.

We may never know for certain the true motivation for this decision, but the people who work and study this stuff full-time, have reasonable suspicions of the real intent behind the release of oil from the SPR.  If the chasing speculators out of the market was the primary motivation, it was a terrible decision.  The government’s attempt to artificially control prices never works out well in the end.  Furthermore, this type of foray into the free markets is a dangerous exercise/abuse of power.

Advertisements
  1. No comments yet.
  1. No trackbacks yet.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: