President Obama has asserted ad nauseam that expanding oil drilling would not affect the price of oil and generate price relief at the gas pump. He has scoffed at the 'drill, baby, drill' plan, denouncing it as insufficient in dealing with our "long-term" energy needs. Now that his reelection prospects are beginning to wither, Obama is undergoing a foxhole conversion and easing his aversion to that "addictive" black substance. Or, so it seems.
Last Thursday, after several weeks of steady decline in the price of oil, and following secret meetings with the Saudis, Obama had an epiphany. Did he suddenly accede to calls for expediting drilling in the Gulf and in Alaska? Did he agree to lift the permitorium on drilling in 97% of the Outer Continental Shelf? Not a chance. Instead, his Energy Secretary announced the release of 30 million barrels of oil from our Strategic Petroleum Reserves (SPR), in conjunction with a 30-million-barrel release from other countries within the International Energy Agency (IEA). The total release will be 60 million barrels, proceeding at a rate of 2 million barrels per day (bpd) for a month.
The administration cited the loss of 1.5 million bpd from cessation of production in Libya as rationale for this unprecedented move. The problem is that the Libyan disruption occurred four months ago, inducing a sharp spike in the price of oil at the time. Obama categorically rejected the idea of tapping the SPR to mitigate the upward trajectory in oil prices, even as the price of gasoline soared over the dreaded $4 mark. Now that gas prices have declined over 40 cents and are trending down, due in part to the end of QE2, Obama decided that we are in an energy crisis to the degree that it warrants a release of the SPR!
While the steady drop in oil prices should clearly preclude any justification for the release, Obama felt that the precipitous drop in his approval ratings is tantamount to a national emergency. What he lacks in perspicacity of judgment regarding economics, he compensates with cognizance of polling reports.
On Friday, Tim Geithner became defensive when it was suggested that the SPR drop was political. Geithner responded to this charge of impropriety saying, "it's really as simple as this: there's a war in Libya, costs between one and two million barrels a day in lost output, I think 140 million barrels off the market so far." If it's so simple, what took four months?
Aside for the fact that Obama is manipulating our emergency petroleum reserves for political gain, and exhibiting a lack of foresight in the timing of such a move, he is also revealing his energy policy duplicity for all to see. What happened to his disdain for short-term solutions in lieu of more prudent long-term solutions? What will happen to the price of oil when the 30-day release comes to an end? If anything, prices will climb to even higher levels than they were prior to the announcement, due to the increase in demand that will invariably follow during the next month.
Obama's impulsive decision also begs a broader question: if the release of an additional million bpd has such a consequential effect on the global market, shouldn't we drill in ANWR so we can produce an additional 1.5 million for 20 years? Let's throw in the National Petroleum Reserve (NPR-A), the Arctic coast of Alaska (where Obama is blocking Shell Oil from drilling), the Outer Continental Shelf, shale fracking in every state, and deep water drilling in the Gulf? How about releasing the Keystone Pipeline project from the jaws of the EPA so we can import more oil from our ally, Canada? The development of these reserves would net billions of barrels of oil and trillions of cubic feet of natural gas. What happened to long-term solutions? Or maybe Obama plans to renew the SPR release every 30 days, creating a permanent fixture in the energy market – the same way that unemployment benefits, another temporary band aid, have become a permanent drag on the job market.
The administration can no longer hide behind the puerile argument that increased production will fail to lower the cost of oil. Look no further than the abrupt price decline that the SPR release has spurred. Just the announcement alone caused a 4.6% drop in the price of crude oil. We welcome the administration's newfound appreciation for the prescience of market futures. Now let's get rigs in place in all the aforementioned reserves and we'll see what happens.
Such perennial steps toward energy independence would permanently lower the price of oil, unlike Obama's plunder of the SPR, which engendered a mere temporary decline. Oh, and they would create thousands of jobs too – ones that wouldn't be countermanded by ATMs. Instead, Obama has stubbornly obstructed every attempt to ramp up our domestic production, causing years' worth of setbacks to the energy industry.
The withdrawal from the SPR seems especially convoluted being that such a grave decision is typically triggered by an emergency like the Gulf War in 1991 and Hurricane Katrina in 2005. In fact, those were the only two occasions in which the SPR was previously tapped. Then again, maybe Obama was correct to presume that we are experiencing a severe disruption in oil production. There is a disruption in production; it is of his doing.
Sadly, this irresponsible decision will only exacerbate the problem. These 30 million barrels will not come from newly produced oil. As such, they need to be repurchased in order to refill the reserves. As the Heritage Foundation notes, the Energy Policy Act of 2005 requires that the reserves be refilled as expeditiously as possible.
Now we face the prospect of buying back the oil at a higher price, as demand increases without a commensurate, permanent increase in supply. Moreover, oil traders will be incentivized to buy up more supplies at the artificially low price, with the intent of holding it until they can sell it back at a higher price in a month from now. It will be entertaining to watch Eric Holder grandstand against the nefarious oil speculators once oil prices begin to rise again. This entire charade is a counterintuitive market distortion, devoid of any ability to change the long-term outlook of market prices for oil.
The unfortunate reality is that the only long-term solution to high energy prices is to repeal the man who desires 'European-style gas prices' from the White House. Until then, gas prices will fluctuate based upon that man's approval ratings.