Oil Prices the Day after Reserve Tapped

It has to be embarrassing when something fails so immediately. The reason that President Obama and the International Energy Agency announced that they would release 60 million barrels of oil (30 million from the U.S. Federal Reserve) was to drive down oil prices by pushing more oil into the market. (Simple supply and demand, right?)

That worked…yesterday. The price for a barrel of oil dropped a few dollars, below $91. But today, prices are hovering slightly above $91. Wasn’t the intent of the release from our emergency reserve to drop oil prices?

One day or even one week doesn’t make a trend, but the fact that prices are steady just a day later highlights the flawed rational behind the strategy. It also shows just how much economic woes are weighing in on the decision makers. According to the Wall Street Journal:

“While the move was intended to ease pressure on the global economy, many investors saw it as yet another sign that policy makers are particularly worried about recent signs of a slowdown.”

Indeed the economy is slowing down, but remember it was never picking up that quickly to begin with. Some even believe the move by President Obama was a backdoor stimulus (the kind that actually puts money in your pocket, not the kind that gives it to the President’s selected people.) Russ Certo, the co-head of rate trading at Gleacher & Co. said:

“Today’s events in oil should be considered the equivalent of a global coordinated rate cut.”

Others believe this won’t have a long term effect at all. In 2005 – the last time oil was released from the reserve – prices dropped 3%, but climbed back up within months. These are temporary supply side injections, after all.

Remember yesterday when the administration said the results would be reviewed after 30 days? Well if prices start to climb…you can be sure they’ll consider releasing more.

By releasing some of our oil reserve Obama was getting a quick fix – he got a very quick fix that doesn’t appear to be lasting. What could last is if he would open up domestic oil drilling – but remember, he is doing everything he can to lower gas prices.

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