Oil shortage, demand problem, speculators or weak dollar?

Posted By on July 2, 2011

What’s with the sudden rise in oil price again? We’ve seen our weak economy take a crushing blow from rising oil prices once again. We all know that there has been an oil moratorium on U.S. oil ever since the BP oil spill … or perhaps since President Obama moved to the Whitehouse, but the sudden increase might have more to do with speculation and a weak dollar rather than supply and demand.


I found an “Oil, Oil Everywhere” article written by Andrew Meggison to be an interesting read.

The Obama administration has released 30 million barrels of oil from national oil reserves in an attempt to quell the high price of fuel and prop up an ailing economy. At the same time, some economists predict that America will soon fall into a “double dip” recession.

Gas prices are on the decline. However, even though most states have reached prices of regular gasoline for less than $4.00 a gallon the average price of gas across the nation is still hovering around $3.54 a gallon for regular fuel. Long gone are the days of $1.00 a gallon gasoline.

In the fallout of the 30 million barrel release, which is equivalent to about 1.5 days of oil use in America, there was both criticism and praise of the President’s decision. Other industrialized nations followed suit by releasing oil from their reserves making the total release 60 million barrels of oil. Critics claim that the release of oil from the nation’s emergency reserve was a misuse of resources while members of OPEC blasted the President by seeing the releases as a political ploy that over looked Saudi Arabia’s promise to increase oil production. In the same vein of political ploy, critics were fast to point out that the president is in full campaign mode and the release was simply a way to gain support in the campaign by playing to the voter’s wallets and ignoring international relations.

Proponents of the releases praised the administration for the timely release of the reserves as the summer driving season looms. In an economy that is coming to yet another stand still the people need to spend. Summer is a traditional time for Americans to take to the road for the great American family vacation. That means money gets spent. With high gas prices however those vacations turn to “staycations” and pennies are pinched. Is this the fix all problem for the nation’s economy—no, but every little bit in the boost of consumer confidence helps.

Other proponents have said that is massive release of oil was a shot across the bow to oil speculators who the president has consistently blamed for the high price of oil.

“We would suggest that today’s action represents the first genuine, offensive use of the OECD’s ‘defensive oil weapon’ to send an unforgettable message to OPEC and also to noncommercial players in the crude markets,” said Kevin Book, an analyst at ClearView Energy Partners in Washington.

By tapping into reserves the Obama administration has basically made it impossible for oil speculators to predict and bet on the increase in the price of oil. The idea is that since the market is now flooded with oil there is no profit to be gained by speculating and, essentially, betting money on the increase in oil prices. The speculator aspect to the price of oil has been blamed for around 50% of oils prices. Who knows what the real percentage impact of oil speculation is on the price of a barrel; but with 60 million more barrels of oil all of a sudden floating around the market place, it would seem that the smart money is not on the price of the product going up anytime soon. The announcement alone drove oil prices down almost 5% to below $91 per barrel.

Additionally, the U.S. oil release is designed to help fill a gap in supply caused when political upheaval in Libya and Yemen choked off supplies of light, sweet crude, which sent oil prices higher. The oil industry said the new supplies are not needed and are “ill-timed.”

“There is no supply emergency,” said Bill Bush, a spokesman for the American Petroleum Institute, a group pushing for the Obama administration to speed up approvals to expand offshore drilling.

Republicans in Washington criticized the move, saying it would ultimately hurt American taxpayers.

“This action threatens our ability to respond to a genuine national security crisis and means we must ultimately find the resources to replenish the reserve — at significant cost to taxpayers,” said John Boehner, Republican leader in the House of Representatives.

Yet, oil prices have however surged in the last few days and are now less than a dollar from where they were when President Obama made the controversial decision to tap the nation’s strategic reserve last Thursday. Why?  Some claim the loss of value in the dollar is having an impact. While others think that oil speculators are calling Obama’s bluff by betting that America and the other nations who released oil from their oil reserves will ultimately buy back the very same oil that they let go. Overall it seems that the experts do not really have a definitive answer—such a reassuring thought.

One of the largest things to understand about politics is that the actions taken today will not truly be understood or fully felt until years later. Yes, oil supplies are fine as of today however who knows what a year will bring. Those 30 million barrels were set aside into the American reserves for a reason after all and might be needed due to unforeseen consequences. However, even after releasing 30 million barrels of oil, the U.S. oil reserves still have another 697 million barrels left. So the 30 million barrel release represents less than 5% of our total reserves.

Another thing to remember is that Americans have a very short memory—sure this release might impact gas prices for a few months and people might go and spend money due to reduced pain at the pump—but in the end this is just a patch job to just one of many problems that are weighing on the backs on the American people and at the forefront of their minds everyday of the week.  As things get worse the little short term financial breaks that were felt for only a few weeks or months are soon forgotten.

Source: Gas 2.0 (http://s.tt/12LIV)


Desultory - des-uhl-tawr-ee, -tohr-ee

  1. lacking in consistency, constancy, or visible order, disconnected; fitful: desultory conversation.
  2. digressing from or unconnected with the main subject; random: a desultory remark.
My Desultory Blog