SPR Release Had A Minimal Market Impact—But Might Be Repeated

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Oil price stability is in the eye of the beholder, but without question, since last year’s collapse, prices have remained relatively stable (relatively key words). Nevertheless, with the recent contribution to inflation at higher prices, which has always been a political concern, comparisons abound with the late 1970s. However, if there was a case of pneumonia in that period, it is a headache. Oil prices had doubled to $115 a barrel (adjusted for inflation) in 1980, and inflation remained stubbornly in double digits. Today high at $80 a barrel and 7% inflation (for a month) but up to this point, short-lived.

The fact that oil prices have ‘recovered’ to pre-pandemic levels despite the US and other countries issuing SPRs certainly has done little to influence the markets. Indeed, as the figure below shows, prices fell by $10/barrel after the announcement, but were back to pre-announcement levels after six weeks. The implication is that the market reacted more to the announcement than to the actual release.

In part, this was due to the fact that the releases were, well, small potatoes. The figure below shows the weekly change in US private crude oil inventories as well as the volume released from the SPR, and the former clearly dominates the latter. Given that global oil inventories fell by nearly 1 billion barrels last year, the release of less than 100 million barrels by the US and allies was hardly enough to rebalance the market. The volumes were certainly larger than OPEC+ monthly production growth (the equivalent of 12 million barrels a month), but they are ongoing rather than one-time events and their impact will accumulate.

Which raises the question whether there is a possibility of future release from government shares or not. Given that previous releases seem more symbolic (or less politely, political) than meaningful, it can hardly be ruled out. Headlines about inflation and the damage done to President Biden’s popularity, as well as calls from the progressive wing of the Democratic Party to punish the oil industry (among many others), cannot be ruled out in another release, Especially if the economy hasn’t recovered quickly.

This morning’s NPR talked about price controls imposed during and after World War II, with the reporter saying that most economists believed they were justified in only a few instances, which most scientists believe. Believes that the earth is round. Price controls have always been popular with a certain segment of the population (usually those who buy things), but have a long history of causing long-term dislocations and damage to the economy.

The poster child of this economic disease should be Venezuela. In the 1990s, leftist presidents implemented price controls and even tried to police stores to evade government mandates, but ultimately admitted they were not only ineffective, but counterproductive and removed them. Sadly, Hugo Chavez failed to learn from this and sought to correct inflation with price controls and stricter enforcement. When that didn’t work, he nationalized several companies for refusing to produce goods at a loss. In most cases, production fell through despite the country’s leader’s precepts. Although high oil prices hid the damage for a few years, economic pigeons eventually came home to settle down – except they were more like vultures.

Another SPR release closer to the midterm elections will undoubtedly seem attractive to the administration and its allies, but too slippery for politicians taking responsibility for oil prices. (Ask the leader of Kazakhstan how this happens.) While this would have the opposite effect of agricultural policy, which favors producers, not consumers, it could lead to a future conservative administration using import tariffs or quotas as ideological ammunition. could provide (as in the 1960s) to support the domestic oil industry. And while they may appreciate such a move, I would argue that they are better off with a government that governs best by governing least.

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