Thursday, June 23, 2011

Six Reasons the SPR Release is Stupid

The globally coordinated release of petroleum reserves is the latest evidence that the Obama administration simply doesn't understand markets.

1 - The justification (or "cover") for the SPR release is the loss of North African (especially Libyan) output. However, the Libyan situation is a disruption of indeterminate length, and the SPR release is scheduled to last 30 days.

2 - The price of oil was already headed down in response to market feedback.

3 - A significant percentage of major stock market indices are populated by energy companies, which are hit especially hard by this action, thus exacerbating the ongoing stock market decline.

4 - A suggested alternate motivation for the SPR release is to shake speculators out of their positions, and introduce an element of uncertainty in order to deter future speculation. To the extent that this is successful, the world oil market will be unable to correctly determine the correct price premium corresponding to supply uncertainty. The global market will be less capable of absorbing future supply disruptions.

4a - To the extent that the expectation of future scarcity is successfully driven from the oil market, oil companies will not be given the correct price signal to drill for more oil, and future oil price shocks will be more severe due to a lack of spare capacity that was never developed.

4b - To the extent that the expectation of future scarcity is successfully driven from the oil market, consumers will not be given the correct price signal to conserve energy and buy more energy efficient vehicles, magnifying the impact of future price shocks on consumers.

5 - Impairment of marginal supply development will hit North American exploration disproportionately, deterring the creation of high-paying energy sector jobs in the US and Canada.

6 - An SPR release diminishes our ability to respond to a legitimate use of the SPR such as a natural disaster or terrorist attack.

1 comment:

HMS said...

Joe, we'd like to invite you to become one of our Authors in Alexandria. Invitations have been extended to you by email as well.

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Come contribute your perspectives and opinions to the ongoing conversations there or, even better, start some new - and different - ones of your own. Contact us through the site or directly by return email for full invitations and instructions.