Thursday, August 12, 2004

Release the Reserves?

Have you felt the pinch at the pump recently, and have you seen your 401(k) decline again? Today's markets continued a disturbing recent trend with stocks falling, bond prices rising, and oil reaching new highs.

Larry Kudlow has called for President Bush to stop stocking the Strategic Petroleum Reserve (SPRo) and perhaps even release some of it in an effort to create more supply and lower the price of oil. The fear, of course, is that skyrocketing oil prices will derail the economic recovery underway. Oil prices themselves have risen due to a "fear-factor risk premium" (the idea that terrorism in the Middle East will disrupt steady supply) of around $10-$15/barrel by Kudlow's estimation.

Kudlow cites the instance of Papa Bush releasing reserves during the Gulf War with the result of crashing prices.

Sure, releasing reserves would crash prices. But it is difficult to know how this would play politically. Kudlow is convinced that the rising stock market would contribute to a Bush victory, but he doesn't consider how the means to pumping the market up would play. Democrats would likely be all over Bush for behaving like a short-term oil futures trader, out for himself and possibly compromising national security by decreasing reserves. Now it's likely the case that what Kudlow suggests would have no detrimental effect on national security. And releasing reserves may be necessary to save the economic recovery at some point in the near future. But it's unclear that it would play so well leading up to the election.

Irwin Stelzer agrees that rising oil prices and a falling stock market are not a good recipe for reelection. He is less sanguine than Kudlow, however, that Bush can do much to change the course of economic events at this point. Perhaps Bush can persuade the Saudi royal family to start pumping more crude. Certainly now is the time to exploit those connections.

Releasing the reserves should probably be on the table for consideration, mostly because the economy may really need it. But if it appears to be done in naked self-interest, it may not have the effect that Kudlow desires.


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