Strategic Petroleum Release

Yevgeny Shrago 

Ensuring a good holiday weekend for the millions taking a ride out to a (soon to be closed?) National Park or the beach, President Obama opened up the Strategic Petroleum Reserve, releasing 30 million barrels of oil last week. This move comes even as gas prices continued their month-long decline, reversing the usual summer trend. Energy Secretary Steven Chu attributed the release to energy instability stemming from continued fighting in Libya, Syria and other parts of the Middle East. Beleaguered as this administration is by the debt ceiling battle and the renewed foundering of the economy, it was undoubtedly hoping to get a positive economic image out there to show voters that it cares about the economy.

Normally, this is the exact sort of position that I love to blast. It’s extremely shortsighted: although a war anytime soon is unlikely, Japan’s predicament after its massive earthquake shows the value of keeping some extra fuel on hand in the event that another big earthquake rocks Alaska and damages the port of Valdez, shutting down the Trans-Alaska Pipeline, which carries roughly 15% of domestic oil production. Furthermore, it perpetuates the myth that gas prices can stay low. India and China aren’t going anywhere, and gas prices are going to climb ever upward. This particularly small bandage (about 2 days worth of domestic oil consumption) won’t change the facts about global macroeconomics.

However, there are two reasons, considered or not, that this move may be less about gas and more about serious macroeconomics. The first is consumption smoothing and stimulus. American households can’t buy huge quantities of gas when it’s cheaper in the winter and then sit on their supply until summer, but the Federal government can. If we think of the Strategic Petroleum Reserve as a kind of revolving gas savings vehicle, capitalizing on the government’s ability to store petroleum cheaply, then things don’t look quite as silly. Over the long-term, markets might adjust to this strategy, but with the economy in a precarious position, this is the exact sort of extremely effective temporary stimulus that’s called for.

The second, bigger picture reason is inflation expectations. Although core inflation remains nearly non-existent, spikes in global food and gas prices have masked this trend, making it appear as though inflation could be around the corner without having any of the positive effects on the economy that core inflation does. By picking a moment where gas prices were already falling, Obama helped continue the downward trajectory. If this can ease the public’s fear about inflation, it may ease the Fed’s fears about political costs as well and bring about another round of quantitative expansion. If Obama can get some monetary expansion out of the irritatingly recalcitrant Fed in the fall or winter, the boost to the economy will probably help his reelection chances as well.

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