Strategic Oil Release: “Like Selling a Military Jet to Pay for a Memorial Day Parade”

A jump-start to the weak economy, rather than an easing of any energy crisis is behind the decision by the United States and European nations to release 60 million barrels of oil from their strategic petroleum stocks, says an oil analyst seen as one of the fathers of the idea of emergency oil reserves.

“Now we know what QE3 looks like,” said Lawrence Goldstein, a director of the Washington, D.C.-based Energy Policy Research Foundation, referring to the term economists recently have been using to speculate about the possibility of governments launching a third round of economic stimulus funding—”Quantitative Easing 3.”

“They have no serious ammunition left” to launch another round of economic stimulus, Goldstein said, “so they’ve fallen back on the oil markets. And I think that’s a shame. It’s like selling a military jet to pay for a Memorial Day parade.”

Goldstein was an economist with what was formerly known as former Petroleum Industry Research Foundation in the early 1970s when he and a colleague were asked by then-Democratic senator from Washington State, Henry “Scoop” Jackson, to analyze response to the threat posed to the United States by dependence on foreign oil. Although Goldstein and his colleague argued that dependence was unavoidable, they proposed that the United States could greatly reduce its vulnerability to economic shocks due to supply disruptions by establishing a Strategic Petroleum Reserve. It was not until several years later, after the 1973 Arab oil embargo, that Jackson convinced his colleagues in Congress to put the idea into law.

Since that time, the reserve has been used to address genuine oil disruptions—during wars and following Hurricane Katrina—but it has also been used for other purposes. President Clinton sold oil from the reserve for deficit reduction, for example.

Goldstein argues that today’s large release—30 million barrels from the U.S. reserves and 30 million from 28 other countries under the International Energy Agency umbrella, amounts to an “ineffective, inefficient misuse of strategic reserves.”

“We’re using it as a political instrument to buy temporary respite,” says Goldstein. And although the markets will initially react with lower oil prices, what happens when commodities traders begin bidding on the next month’s contract, he argues. “Since markets are forward-looking, what are they going to do on Day 31?” Goldstein asks.

In fact, U.S. gasoline prices actually have fallen 31 cents, or 8 percent, from their recent high of $4.02 the week of May 9, and now stand at $3.71.

Goldstein argues that because there is no genuine oil supply disruption in the market—the loss of Libya’s oil hasn’t created a true shortage amid the weak economy in Europe, where most of its crude has been bound—the governments are going to find refiners’ bids for strategic oil to be low. The U.S. and other IEA nations will then have to reject the bids as too low, or will be forced to sell their taxpayer-funded oil barrels at below-market prices to refiners, Goldstein predicts. “So they’ll be accused of subsidizing the very industry they’ve accused of squeezing the consumer.”