Since the really big run in crude oil and gas prices began in the spring of this year, I have been convinced that a release of the strategic petroleum reserve has been coming, but maintained that its release would be politically timed in an election year. I believe that time has come.
All of the signs have fallen into line: Not only have oil prices risen almost $20 a barrel since the lows of June, but gasoline is up almost $0.80 per barrel, and is now lapping again at the shores of $4 a gallon. The cover for a release from the Strategic Petroleum Reserve (SPR) has most conveniently been given by Hurricane Isaac, which appropriately made landfall eerily close to the same area of the Gulf Coast where Hurricane Katrina hit almost exactly seven years ago to the day -- although thankfully it did not do nearly as much damage.
That won't matter. Gas prices have again risen far enough to be a potent political weapon against President Obama and despite fundamental facts to the contrary; the SPR has proven to be a potent weapon in defusing that weapon.
Here's why: As anyone who has read my columns or my book knows, most of the premium in oil is held in the upwards financial pressure that is placed on it by hedge funds, index investors, ETFs and algorithmic traders. Fundamentals of real supply and demand are overrun by the financial inputs that have been placed into the oil market for the past 10 years. Removing some of that "long money" can drop oil prices far more quickly and more effectively than any drilling program or demand drop can -- or historically has.You want proof of this? Just look at Monday, when the G7 statement asked for higher output and an SPR release -- a rumor alone of a release. Almost immediately, the crude market shed almost $3 a barrel: long money running for the hills. Fundamentally, we know that a 30-million barrel release can't mean much in a country that burns 24 million barrels a day. This is a case where the threat of a release is almost better than an actual release. But without any action, there's nothing more than "cry wolf" psychology to rely upon. That's why the plan for an SPR release, in my opinion, has to contain three parts: First, threaten a release (which the G7 statement and Jay Carney's White House statements effectively did on Monday). Second, follow through with a release (with international coordination if possible). And third, again threaten further releases until you get the desired flight from the oil trade. And you will get it. Both releases in 2005 and 2011 ultimately had their desired effect in lowering crude and gas prices, if only temporarily.
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