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President Obama Gets It Wrong On the Price of Oil and the Strategic Petroleum Reserve

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On Friday, facing criticism of his energy policies against claims that he has caused prices to rise by having clamped down on domestic production of oil, President Obama sought to reassure the public that global oil supplies were adequate (NYTimes "Energy Policy Defended as Prices Rise" 03.11.11). He pointedly emphasized that supplies were sufficient to offset current political instability in the Middle East.

In the same breath he also ruled out any immediate release of oil from the strategic petroleum reserve (SPR). Integral to that statement, to that decision, President Obama revealed a dangerous lack of understanding of how oil markets currently function. Yes, there is adequate supply. And that is exactly the point.

The commercial inventories of oil are just about as high as they have ever been, and the STP is currently at capacity with some 727 million barrels of oil. Yet the price of oil is as high as it has been since Mr. Obama became President and near three times higher than February 2009, his first month in office.

"If we see significant disruptions or shifts in the market that are so disconcerting to people that we think a strategic petroleum release would be appropriate, then we will take that step."

And then echoing his overwhelmed Secretary of Energy Steven Chu (please see "You Need a Nobel Prize to Be High Dumb On Oil Prices" 03.06.11 ) President Obama intoned,

"Every few years, gas prices go up; politicians pull out the same old playbook, and then nothing changes. When prices go back down, we slip back into a trance. And then when prices go up suddenly we're shocked. I think the American people are tired of that. I think they're tired of talk."

"Tired of talk?" As if the tripling of price on his watch while storage capacity is filled to overflowing would not be reason enough for copious talk and government intercession of what is clearly a speculation driven market.

With inventories bulging and with the Saudis pumping away, the current egregiously high price of oil at some $100 a barrel for West Texas Intermediate Crude (WTI), costing the nation's economy hundreds of billions, can hardly be attributed to rote supply and demand. Were that the case Mr. Obama's decision to let the SPR remain untapped would be defendable.

Rather the distortion in price is massive and it appears that in the halls of this administration the perverse speculation and manipulation that is now going hand in hand with oil pricing is neither understood nor taken into account. And therefore the oil industry and its interests are running roughshod over the economy. On one hand we have a hapless Commodity Futures Trading Commission (CFTC), good at holding endless hearings as a cover for inaction, while the economy is at ever heightened risk (Please see "Time to Dismiss the CFTC Chairman and His Commissioners" 12.27.10), and a President who seems oblivious to the CFTC's lack of efficacy.

The rules of supply and demand are a laughable fiction in the oil market and the one weapon we have in our quiver, that could make the speculators run for the hills is our STP. Releasing even nominal amounts would bring disarray to the oil trading desks of Wall Street and Houston and puncture the price of oil dramatically.

Of course anyone who has skin in the oil game will do their utmost to persuade the President that by touching the SPR he would be dispensing holy water to the infidels. One wonders what advice he receives from those nearest to him such as his Chief of Staff William Daley, recently arrived from his post as J.P. Morgan Chase's Midwest chairman. J.P. Morgan Chase just happens to have a long history of being one of the major forces in oil trading, to the point of chartering oil tankers, loading them to capacity and keeping them at sea months at a time to catch swings in the price of oil. (One could reasonably ask what has massive speculation on the price of oil to do with being a bank?)

Yes, alternative energy programs over the long term will be a welcome and necessary answer. But in the here and now we need our President to act on behalf of all Americans to counter and bring to heel the massive influence, lobbying power and money of the oiligopoly.

Mr. President, open the tap and let some oil flow. It would be nice to see the oil crowd, for once, squirm at the pump.