Thursday, June 23, 2011

Obama "exercises" Strategic Petroleum Reserve Option

The Obama Administration announced today that it is releasing 30 million barrels of oil from the Strategic Petroleum Reserve. The reserve is intended for emergencies and severe oil shocks only, but the last administration also released millions of barrels when Hurricane Katrina severely disrupted domestic petroleum refineries along the Gulf Coast. This is a political acknowledgement that the weight of sky-high gas prices are a drag on an economy that, according to almost all indicators, has stalled since May. Contrary to the snake-oil economics that Donald Trump has been peddling, near term gas prices are largely out of policymakers' control, especially if your remedy is giving OPEC a good talking to. It's a function of simple supply and demand: developing countries are consuming more and more oil, and the war in Libya has reduced global supplies by roughly 1.5 million barrels a day.

All this talk of Obama exercising the reserve option to lower gas prices has gotten my finance juices flowing and I think you could not only make the case that the augmentation in supply might soften the worst of summer gas prices, but also that the administration's calculation is similar to taking a macro short position on oil futures - that is, it expects the price of oil to decline, and by insulating consumers from the oil shock now while price pressures are most acute, it is exercising a sort of derivative financial option to stimulate the economy as a whole given that the reserve bought the oil at a lower price in the past for release at a higher price. This means the government sells its commodity investment at a higher return than what it initially paid to buy it, while injecting capital into the economy by artificially lowering the price of a core good. And it might even get to buy back petroleum at a (hopefully) lower price in the future. Talk about "priming the pump."

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