The Obama administration’s plan to drive gasoline prices down by releasing oil from the Strategic Petroleum Reserve, the country's emergency stockpile, isn’t going over well with the industry, and analysts’ early reactions have been mixed.
Thursday’s announcement to release 30 million barrels of crude in order to put more oil in the market comes amid mounting political pressure to address the rising cost of gasoline.
“We are taking this action in response to the ongoing loss of crude oil due to supply disruptions in Libya and other countries and their impact on the global economic recovery,” Energy Secretary Steven Chu said in a statement. “As we move forward, we will continue to monitor the situation and stand ready to take additional steps if necessary.”
The release of oil from the U.S.’s Strategic Petroleum Reserve was coordinated with a similar move by the International Energy Agency, which said it would also release oil from global stockpiles. With the U.S. contributing 50 percent, 28 IEA member countries pledged to release a total of 60 million barrels of oil over the next several months.
Forbes reported that crude oil prices and shares of oil companies plunged on the news, with Brent crude down more than $6 to $107 per barrel and West Texas Intermediate off $5 to $90. Shares of ExxonMobil, Chevron and Occidental Petroleum were all down 3% in mid-morning trading, it noted, and the Dow was down 220 points.
The Houston Chronicle reports this morning that reaction from analysts has been mixed:
Craig Pirrong, a finance professor at the University of Houston who specializes in commodities, also was skeptical of the timing of the release. And while oil prices have fallen on the news today, it’s hard to truly say what the short and long-term price impacts will be, Pirrong said.
“Markets are down broadly due to lousy U.S. jobs numbers,” he said, noting the dollar is also rallying, which typically leads to lower oil prices. “Economic news other than IEA accounts for a good chunk of the sell-off.”
Pirrong also cautioned that releasing oil from storage means decreasing tomorrow’s potential supply, even as it boosts supply immediately. “That has offsetting effects on prices over time,” he said. There may be “some initial relief, perhaps, but (it’s) not a long term palliative.”
Amy Myers Jaffe, a senior fellow at Rice University’s Baker Institute of Public Policy, said the release is both politically and economically motivated, but insisted it’s still the right thing to do.
“Given the instability in the Middle East it is important to signal that the SPR is on the table and that a supply crisis can be avoided,” Jaffe said.
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“I am only getting a little nervous about two projects — the proposed Sasol GTL facility [not the new ethylene plant] and the proposed G2X facility — both in Lake Charles. They need a hefty difference between oil and natural gas prices to make sense.”
Lower oil prices also might slow the growth of oil production in parts of the U.S., Canada and elsewhere because it will no longer be so profitable.
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