Political pundits who are already naysaying the Obama Administration’s decision to release 30 million barrels of oil from our strategic reserves have no idea how Wall Street works. If the intent of the release is to beat oil futures speculators into submission, the time to do so is when the market is already trending downward. The decision to coordinate this release with International Energy Agency countries is likely more serendipitous than prescient. Government intervention of this sort, as we have seen before, is often initiated in rising markets where price support has been steadily rising, which is usually the worst possible moment to attempt to increase supply in an effort to reduce prices at the pump. This action may add momentum to a downward movement in oil futures that began about three weeks ago.
Perhaps an extra 2 million barrels per day will alter the psychology of the futures markets and catalyze a larger price drop than we've seen today. By itself, that seems unlikely. Because it's a temporary measure, the market will want to know what comes next, and that's the real problem. Unless the designers of this program have made a lucky choice and timed their release to coincide with a further easing of prices due to weakening demand, the calls for another release will start in a month, if prices remain at a level deemed high enough to threaten the economic recovery. Selling off 4% of the SPR in the absence of a real emergency--and with no clear plan for replacing it--might not be a big problem, but additional releases that added up to a substantial portion of the reserve would be.
What the pundits are right about are the political calculations that go into such a decision. The American public cannot tell you what M1, M2, the CPI index or the rate of inflation was last summer. What the public does remember is the price of gasoline, a number that we all deal with in real-time on a week to week basis. I can’t blame the president for trying to give himself an advantage come election time. The real question in a situation like isn’t whether or not the release is the right thing to do, but whether or not the replacement cost of the 30 million barrel release will be outweighed by the aggregate amount of money Americans save at the pump in the coming months.