Very good article taken off of Bloomberg supporting yours and Arnos view on the oil release.
Caroline Baum
Sat, 23 Sep 2000, 12:57pm EDT
Summer's Over, Political Season in Full Bloom: Caroline Baum
By Caroline Baum
New York, Sept. 21 (Bloomberg) -- Democratic presidential candidate Al Gore wants his boss, Bill Clinton, to release oil from the Strategic Petroleum Reserve, a cache of 571 million barrels of crude oil designated for use in the event of national emergencies.
Treasury Secretary Larry Summers and Federal Reserve Chairman Alan Greenspan argued against it, according to a story in today's Wall Street Journal. The Journal obtained a copy of a memo Summers wrote on Sept. 13.
Before this could turn into a battle of politics versus economics, politics won. In what is surely one of the most blatantly political acts of a highly political season, Summers reconsidered his advice.
``We always recognized that this would be and indeed has been a rapidly evolving situation,'' said a statement released by the Secretary's office shortly after noon New York time. ``There are a number of approaches for prudent use of the Strategic Petroleum Reserve that are now on the table, including those the vice president has proposed, which could be appropriate in current circumstances.''
Dear Larry
Only eight days ago, Summers advised President Clinton against tapping the Strategic Petroleum Reserve. Using the SPR to ``manipulate prices'' would be ``a major and substantial policy mistake'' and ``set a dangerous precedent,'' the Secretary wrote. While conceding that there might be some ``focused and targeted'' alternatives for the SPR, Summers wanted to avoid the appearance of impropriety that would certainly arise if the administration tried to lower oil prices in front of the November election.
How quickly things change. Summers must have gotten a short memo from Al Gore this morning: ``Dear Larry: You enjoying that big corner office in the Department of the Treasury? Regards, Al.''
Whether the amount of petroleum released by the SPR will have a significant effect on prices or merely serve as a gesture demonstrating that Al Gore is working for the people, the decision to tap what the Department of Energy calls ``the nation's first line of defense against an interruption in petroleum supplies'' is questionable.
Supply or Demand?
It is not even clear whether the rise in the price of crude is the result of increased demand or decreased supply. Surely there is no evidence of a disruption in crude supply.
Take OPEC, for example. The Organization of Petroleum Exporting Countries, an easy target, has increased production quotas three times this year. Actual output for the 11 member countries rose to 28.8 million barrels a day in August from 25.5 million in December, according to estimates compiled by Bloomberg News.
The International Energy Agency reported yesterday that OPEC has the capacity to pump only 2.2 million barrels a day more than the 29.2 million the group is expected to produce next month, with all of the excess capacity in Saudi Arabia.
The market's price signals are, in fact, working the way they're supposed to. When prices rise, producers are induced to bring more to market, whether it's corn, cotton or crude. It may be easier for Farmer Jones to allocate more acreage to corn instead of soybeans than it is for Exxon Mobil to drill a new well. But the same rules -- the law of supply and demand -- apply.
Eco Al
Domestically, higher oil prices are encouraging new production, too. The rig count, a sign of the health of the industry, reached 1012 last week, according to Baker Hughes Inc. That's a 107 percent increase from the all-time low of 488 in April 1999, when crude oil prices averaged $17.30 a barrel.
Much of that increase was in natural gas rigs: from 362 in April 1999 to 816 last week. But the number of oil rigs doubled from a low of 98 in August 1999 to 194 last week. If the ecologically correct Gore were less worried about the earth being in balance, there would be more exploration, more oil, and lower prices.
Alas, Gore constantly berates oil companies (substitute drug, tobacco or insurance for oil) for turning a big profit while consumers are getting gouged. He wants us to drive cars and buy homes that use alternative fuel. And if you are a good citizen and do what he wants, you'll get a tax break for good behavior if he becomes president.
The problem is not crude oil but heating oil. And here's where the price signals may be working against the U.S.
Rotterdam Bound
Oil refiners are producing as much heating oil as they can, given their capacity, but higher prices in Europe are drawing barrels overseas, according to Sarah Emerson, managing director at Energy Security Analysis.
``Yesterday a barrel of gasoil brought $2.50 more in Rotterdam than it did in New York,'' Emerson says. ``This is the time of year that the arbitrage window usually opens up in favor of New York harbor.''
Releasing crude oil from the SPR won't necessarily correct the price signals, which make it more attractive for a Gulf refiner to divert cargoes to Europe. In fact, ``it could make it worse,'' she says.
Lowering the price of U.S. crude oil could actually exacerbate the premium in Rotterman. ``You have to ask yourself, what price mechanism will get the marginal barrels to New York harbor?'' Emerson says.
While it may be counterintuitive, a higher price for U.S. heating oil, which at $1.0070 a gallon is close to 10-year highs, would pull in marginal barrels.
``Using the SPR to address a spike in petroleum products is an issue that is subject to enormous debate,'' Emerson says.
The debate within the Clinton administration has clearly ended.
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