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Obama's Petroleum Reserve Tap Could Snuff Out Speculators: Experts

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OBAMA OIL

On first inspection, President Obama's decision to tap the nation's petroleum reserves, announced Thursday, seemed far more symbolic than consequential: Only 30 million barrels of oil will be injected into the national supply over the next month -- less than what the United States consumes in two days.

But energy experts emphasized that symbolism has a way of altering perception in global markets, molding a new reality.

Oil prices, stocks of major energy companies and futures prices all plummeted following the announcement, as traders interpreted the news as a sign that the Obama administration will take a harder line against high oil and gas prices. Crude oil futures plunged to a four month low on Thursday, and Goldman Sachs projected that crude oil prices could drop by as much as $12 a barrel -- more than 10 percent -- by the end of July.

In this case, Obama's move appeared to convince traders that his administration is intent on intervening in the markets and snuffing out speculative zeal in order to confront the soaring price of gasoline. Rising prices at the pump have been putting Americans in a particularly thrifty mood, just as fears deepen about a weak and slowing economy.

“It will hopefully keep speculators from getting back in the market for fear that [Obama] could do this again,” said Daniel J. Weiss, a senior fellow at the Center for American Progress. "It is very important to burst this speculative bubble.”

The administration's action was part of a coordinated campaign with the International Energy Agency, which announced plans to expand the global supply by 60 million barrels of oil over the next 30 days. The United States will lead the effort by providing half of that amount from its emergency stock, the Strategic Petroleum Reserve.

Both the Obama administration and the IEA cited the ongoing conflict in Libya as an imperative for expanding the global supply, asserting that chaos in that country had effectively taken an estimated 132 million barrels of oil out of the market through the end of May.

Some energy experts have asserted high oil prices are in part the result of speculators, who have exploited global instability to send prices skyward. Since last June, oil prices have climbed by nearly 50 percent. Earlier in the week, federal regulators launched a probe into whether oil companies and refineries have manipulated prices.

Senior administration officials told Reuters that they have decided to release oil from emergency reserves in order to help the debilitated U.S. economy.

But analysts were divided over whether the action will ultimately offer lasting relief.

Using the results of past emergency reserve sales as a guide, Weiss estimated that gas prices will fall by about 25 cents per gallon, collectively saving about $95 million per day for American consumers.

But MIT energy economics professor Christopher Knittel estimated that gas prices would fall only about 2 to 3 percent, which would translate to about 8 to 11 cents per gallon in New York City.

Knittel emphasized that the science of estimating the impact of any one infusion of oil is very imprecise, since a number of variables affect oil and gas prices. He criticized the administration's attempt to lower prices, arguing doing so would interfere with the fundamental message of the market's high prices: the need to conserve energy and embrace renewable sources.

"It signals to consumers that the administration appears to be willing to use the strategic oil reserves to move oil prices, and I think that is a bad precedent to set because U.S. consumers should face the actual price of oil," Knittel said. "It’s also not obviously sustainable.”

Proponents of expanding American oil production took a different, but still critical, position, asserting that by tapping the strategic reserve the government risks sowing a false sense of relief, undercutting momentum for domestic drilling.

Spencer Pederson, press secretary for the House Natural Resources Committee, said the reserves are meant to be used to address severe supply shocks, and not simply to roll back rising oil prices. He urged the administration to "go offshore, go onshore and drill for more oil," adding that this would stimulate the economy by creating jobs, as well as by bringing down oil prices.

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