The Obama administration announced this morning that it would release thirty million barrels of light sweet crude from the U.S. strategic petroleum reserves. I have mixed feelings about the announcement: this is in gray territory. I’m skeptical but inclined to give the administration the benefit of the doubt.
The SPR is meant to respond to genuine supply disruptions, and there has indeed been one. Moreover, with the United States hurting economically, there’s a case to be made for erring on the side of easing near-term burdens on the economy even if it complicates long term policy.
But it is not clear where this intervention ends. The Libyan disruption is going to continue for months if not years, and the United States does not have the capacity to keep on covering the shortfall without running unacceptable risks. Is this going to be repeated next month? The month after? If it is, the United States will start draining the SPR. If it isn’t, what’s the rationale for the one time intervention?
And, given all these questions, how much uncertainty is this introducing into the market? “There was a disruption, and we responded”, which is basically the public rationale thus far, doesn’t tell people anything about what the U.S. will do in a month or two if, as will be the case, Libya remains offline. This sort of uncertainty is not a good thing for the markets or the economy. At the least, it would be wise for the administration to explain a bit more about how it will make decisions going forward.
The best case I’ve heard for this being a one time thing is that increased Saudi production will take some time to come to market, and the SPR release will tide markets over until then. That is a best case, and I will be happy if it comes true. Indeed if it does, it will go a long way toward vindicating today’s action. But if Saudi doesn’t ultimately step up production, I’ll be interested in seeing that the United States does next. I doubt that it will have any good options.
The other thing that makes me a bit more comfortable with the release is the fact that it’s being coordinated with the IEA, and is being done at least in parallel with Saudi. The current oil market problem is in some sense Europe’s – it’s their refineries that need light sweet crude but can’t get it. But it’s also, in a bigger sense, America’s – the higher gas prices that result are a bigger economic problem for the United States than they are in the eurozone. This sort of shared problem should be dealt with through a shared response, and it’s useful to have a concrete action that affirms this.
I should also say something about a question I’ve been getting all day: Why now? Is this a move to distract Americans from something else? Or does the U.S. government think there’s something big, geopolitically, coming down the pike? My guess is that the explanation is simpler. It’s pretty clear from news reports that the Obama administration has been looking at this for some time. But my guess is that it’s far more comfortable doing it as part of an IEA action (and alongside a Saudi production increase) than by itself. (As Dan Drezner notes in a smart new article in Foreign Affairs, one of the key themes of Obama administration foreign policy has been a focus on making sure that others carry their fare share of the response to global problems.) It presumably took some time to get all that lined up – neither the Europeans nor the Saudis have been particularly eager to take action. I wouldn’t be surprised if reaching that political threshold was what convinced the administration to pull the trigger now.