Release of Oil from the SPR – Desperately Trying to Fix the Economy

[GliderGuider]

Release of Oil from the SPR – Desperately Trying to Fix the Economy

Both the amount and the timing of the release are strange. The amount of the release is equivalent to 2 million barrels a day. This is actually more than the Libyan disruption took off the market, which was about 1.4 million barrels a day. The disruption first took place in February, and oil prices have been declining since early May, so the timing is strange, as well. What the timing of the oil release is close to, is the end of Quantitative Easing 2 (QE2). QE2 is the United States’ program of buying back debt to keep interest rates low and the dollar low, which began November 2010 and is scheduled to end June 30, 2011. It was intended to stimulate the economy, and oil prices have indeed risen during most of the time it was in effect.

If we look at oil price and the S&P 500 Index (Figure 2), there has been a significant correlation between the two since late 2008. When oil prices drop, so does the S&P 500 Index, most likely since this means the economy is “tanking.” When oil prices rise, so does the S&P 500 Index, indicating the economy is working well.

No doubt one thing Ben Bernanke and other government officials are worried about is a repeat of the 2008 recession, or even worse. Their thought would seem to be, “If we can only get the oil price down, maybe it won’t sink the economy again.” If we look at US’s external debt (Figure 3), it started shooting upward, just as high oil prices became unsupportable by the economy in July 2008.

No doubt Bernanke and others have figured out the obvious–the United States is not in good enough shape financially to attempt another stimulus program, if recession hits again in full force. Letting oil out of the SPR would be a different way of perhaps getting the oil prices down, that wouldn’t “kill” the economy in the process.

ETA: This makes a whole lot more sense than "trying to squash the speculators".