In less than two months, the price of Brent crude has risen from around $90 per barrel to threaten $120 per barrel again. At the pump, gasoline prices are up about $0.30 a gallon since late June. Rising gasoline prices are not going to help President Obama get reelected.

Thus, an exclusive report from Reuters this morning cites “a source with knowledge of the situation” who says that the president is “dusting off old plans” to release crude oil from the U.S. Strategic Petroleum Reserve. The plans are not really so old.

In March the United States, France and the United Kingdom discussed the possibility of a coordinated release from strategic reserves. In May at a meeting of the G8 leaders at Camp David, another discussion took place. In neither case did a release occur, but crude prices did moderate. The mere threat of a release from strategic reserves typically has this effect.

From the Reuters story:

As prices rise again, U.S. officials were now collecting information from the market about potential needs and studying futures, production numbers and data on Iranian oil exports.

“The driving force in this is both impact on the economy and impact on the Iran sanctions policy,” the source said, noting that Washington did not want rising oil prices to create a windfall for Iran while international sanctions were having an effective impact on its crude exports and revenues.

If this is the best analysis the White House can get on what’s causing crude prices to rise, then the rumored release could well happen. Garbage in, garbage out, as they say.

Let’s get it straight. Crude supply right now is adequate to meet demand. Iranian exports have fallen by more than half, effectively cutting of a large piece of the country’s revenue. And some countries, like India and China, pay in local currency, which must be spent in India or China. The sanctions are having their intended effect, and there is no “windfall” to Iran.

Crude prices are rising now for one reason only: traders believe that governments will be forced to add stimulus to the global economy very soon. That stimulus will boost the corporate profits and demand for energy. Therefore crude prices will rise.

The global economy will not get well by itself, at least in any reasonable time frame. The eurozone will see to that. Investors have been waiting for China, the U.S. and Japan to add more stimulus to their economies. If the world’s three largest economies do what most people believe they will be forced to do, then crude prices inevitably will rise.

If the global economy does improve — whether stimulated or not — then a short-term release from strategic reserves will have at best only a temporary effect. If the economy continues to sputter, crude prices will fall without any help.

Paul Ausick

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