Acts of Desperation: More Thoughts On The Release of Oil From Global Strategic Petroleum Reserves

Yesterday, Fed chairman Bernanke said he cannot explain the "soft patch" and he says US won't see growth until 2012.

So, what does the Obama administration do in response to those two inconvenient truths? The administration releases oil from the US strategic petroleum reserve.

The price of oil was already heading down. The Saudis said they would increase production and most suspected slow US economy would put a drag on oil consumption. That alone meant there was no reason for releasing oil.

President Obama will release 30 million bbls from the US strategic petroleum reserve. Saudi said they would increase production as much as 1 million bbls per day; thus, the SPR release equals what the Saudis could do in one month.  If the price of oil goes down much, OPEC can simply cut production. Releasing oil from the SPR for these reasons is a fool's game. Not only was it not needed, but when the US goes back to topping off the caverns, it will be buying oil at a (much?) higher price.

Not only that, cheaper oil means more pressure on renewable energy, particularly solar which was already in free fall. Cheap oil pretty much means the end of renewable energy. President Obama consistently said that renewable energy projects would result in more jobs. Cheaper oil leads to less interest in those renewable energy programs, and thus less jobs. (I'm only using the administration's assumption that renewable energy projects mean more jobs. I don't buy into that argument, but that discussion can be held another day.)

I assume the decision to release oil was an attempt to stimulate the economy, to help folks who are pinched at the pump. But Obama himself has said every $10 increase in oil translates to only 25 cents per gallon at the pump. Thus, at most we will see is gasoline going from $4.00 to $3.75 per gallon which, one can argue, doesn't mean a whole lot for the average consumer, except perhaps psychological. I have to admit: I prefer $3.75 on the marquee rather than $4.05. But on a 20-gallon fill-up, that's a savings of $6.00 ($81 vs $75) -- not much of a difference. I guess if one fills up five times a month, that's a savings of $30 a month. Hmmm.

I doubt the opening of the SPR will have much near term effect on oil exploration and production, but if there is any effect, it will slow down CAPEX, stifling the domestic oil industry, the sector that leads all others in terms of jobs. [Speaking of jobs: several hours after putting up this post, I ran across this article -- jobless claims up to 429,000 -- disappointing.

Initial claims for state unemployment benefits climbed 9,000 to 429,000, the Labor Department said Thursday.

Economists had expected claims to come in at 415,000. 

The report was the latest in a long-running series of data to underscore the lingering weakness in the U.S. recovery and came a day after the Federal Reserve gave a gloomier assessment of the economy.]

To me, the administration's decision to release oil from the SPR at this point was an act of desperation. They need to improve the job picture. Ironically, the combination of Bernanke's remarks and the SPR decision has spooked the market, dropping almost 300 points after the announcement. Companies are not going to be hiring when tbe market is this spooked, when the debt ceiling negotiations appear to have come to a standstill, and when the Fed chairman says there will be no growth until 2012.

But there's more to the story.

The decision to release oil from the SPR did not occur overnight. This must have been debated for quite some time before the decision was announced. My hunch is that the White House was as surprised as the rest of us with Bernanke's brutal honesty: no growth until 2012. The coincidental timing of Bernanke's remarks and the announcement to release oil from the SPR worked at cross purposes. If there is to be no growth until 2012, the price of oil would have fallen on its own, and, in fact, the price of oil had already begun to fall.

Bernanke cannot explain the "soft patch," the world was awash in oil (for the near term), no growth is executed until 2012 which means less demand for oil, and yet the president releases more oil on the market, which at best will drop the price of oil to $3.75 from $4.00 per gallon. I think President Obama blew the timing on this and he blew it spectacularly.

There have been several stories in the past two days of President Obama overriding the recommendations or opinions of his lawyers and generals. Yesterday, polls showed a significant drop in support for Obama. In another poll, only three of every ten folks asked, plan to vote for Obama in 2012.

These are acts of a desperate man:

• Withdrawing troops from Afghanistan early for political reasons, negotiating with the Taliban to fill the void
• Releasing oil from the SPR for political reasons, against all common sense
• Overriding his own lawyers, arguing the US is not participating in hostilities over Libya and possibly even on the ground (it's hard for me to believe we don't have covert forces, or at least advisers, on the ground in North Africa

If House republicans see this the way I do, that the president appears to be acting as a desperate man, they won't budge on negotiations with regard to the debt ceiling. Cooler heads will prevail, I hope, and the US won't default, but it's going to be an interesting summer. [Update: about two hours after posting this, I see that the GOP has walked out on debt ceiling talks.]

As for me, I'm going to keep buying shares in oil companies and oil services but limit my buying to well-financed blue chip international companies and one or two of the bigger Bakken companies as well as one or two smaller Bakken companies that might become takeover targets. The risk, of course, is that the small Bakken companies, to execute their CAPEX programs may have to raise cash by issuing more shares.

My understanding is that the earth's population is soon to be growing the equivalent of a one-million-person city every week. That's a lot of internal combustion engines.

There is neither space enough nor time enough to continue the discussion in the comment section.