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Obama's Dueling Economic Policies   June 24th, 2011
Manipulating the price of oil will not save economy from damage done by Obama       

 
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Our economy continues into uncharted territory as we pass Rubicon after Rubicon, and we've now entered the surreal. Yesterday we were treated to the spectacle of two personalities of Obama's schizophrenic economic policy dueling amongst themselves on the world stage.

The two competing economic policies relate to the price of petroleum: The Federal Reserve printing money which raises the price of oil, and releasing oil from the strategic reserve to try to lower the price of oil.

Dueling Personality #1: Release of Oil From Strategic Reserve

Back in March President Obama wisely declined to release oil from the strategic petroleum reserve to address rising oil prices.

From back in March:

The United States will not tap the U.S. Strategic Petroleum Reserve, President Obama said today, despite predictions by some economists and analysts that the devastating earthquake and tsunami in Japan will affect financial markets around the globe.

"Right now, we're not seeing a shortage of supply," the president said at his news conference in Washington, D.C.

The petroleum reserve is intended for "a severe disruption in supply," he said, but refineries are operating at a "fairly" full capacity.


And I completely agreed with that decision. The strategic reserve should be used for true emergencies--natural disasters or critical strategic supply interruptions, such as a wholesale embargo of OPEC oil. We need a strategic reserve we can tap to give us long enough to respond to the emergency or address the severe supply disruption.

But, yesterday, Obama reversed one of the few correct decisions he has made:

The U.S. Department of Energy said Thursday it will release 30 million barrels of oil from the Strategic Petroleum Reserve to alleviate Libyan supply disruptions -- driving already sinking prices lower...

"We are taking this action in response to the ongoing loss of crude oil due to supply disruptions in Libya and other countries and their impact on the global economic recovery," said Energy Secretary Steven Chu...

"There is plenty of supply," Kilduff Group partner Mike Fitzpatrick told CNNMoney. "They want to push prices down to help the U.S. economy."


So when oil prices were at over $100 (and still rising) in March, President Obama wisely opted not to tap the strategic reserve. But now, when prices are already under $100 (and falling), he decided to go ahead and release oil.

As Mike Fitzpatrick indicated above, it's not because of supply disruptions as Energy Secretary Chu claimed. There is "plenty of supply." Rather Obama is releasing oil to artificially lower the price of oil in the hopes of helping the economy--even though oil prices were already falling!

Dueling Personality #2: Printing and Spending Money

The other aspect of the personality is the fact that the reason oil prices have been so high is precisely because of our policy of printing money. So not surprisingly, as QE2 supposedly winds down, oil prices have been dropping even without using the reserves.

Tracing it backwards, oil prices are high because printing money is devaluing the dollar. When the dollar is worth less, oil priced in dollars costs more. And the Federal Reserve is printing money so that it can loan it to the Federal Government. And the Federal Government is borrowing the money from the Federal Reserve because Obama's outrageous deficit spending has exhausted all the money foreigners are willing to lend to us.

So, ultimately, Obama's policies are what are driving high gas prices in the first place. And now Obama is trying to counteract the damage of policy #2 by implementing policy #1.

Stinging the Speculators

In addition to trying to correct the damage Obama's own policies are having on oil prices and trying to execute a mild "stimulus" that doesn't require congressional approval, the other observation is that this may have been a strike against oil speculators.

Thursday's surprise release of 60 million barrels of crude reserves is not about keeping oil consumers well supplied. It's about chasing oil speculators out of the market.

And it seems to be working.

'This is the straw that breaks the camel's back -- this is the tipping point,' said Fadel Gheit, oil analyst for Oppenheimer, a leading investment bank. 'The speculators will have to change their positions. Instead of betting on higher prices they have to bet on lower prices."

Obama (and Democrats since 2008) have been aggressively demonizing "speculators" as the evil cause of high energy prices. From their perspective, the weakening of the dollar isn't the cause, nor is reducing our own capability to drill for oil in the U.S. Nah, the problem isn't the laws of supply and demand in the currency and oil markets. It's the bad, evil speculators.

Obama thinks that the reason the price of oil is high is because speculators are speculating that the price of oil will be higher. The speculation, then, is self-reinforcing such that if everyone thinks the price of oil will go up, they'll bid the price higher and higher and it becomes a self-fulfilling prophecy.

Of course the question must be asked: Why do speculators think the price of oil will go up?

I'm not an oil speculator myself, but if I were an oil speculator I'd be betting the price of oil will go up precisely because Obama's policies are driving down the value of the dollar and because Obama is strangling supply by refusing to let meaningful drilling happen in the U.S.

So the common sense solution would be for Obama to let the free market work. He'd stop borrowing and spending so much money and the dollar would rise and the price of oil would drop. Likewise, he could allow the free market to extract oil from our own territory thereby increasing the supply of oil... and oil prices would drop.

But Obama's policies intervene and interfere in the oil market and distort the value of the dollar. And instead of addressing that by removing the causes (Obama's bad policies), he's trying to solve a problem caused by government interference by interfering once again in the oil market by releasing reserves.

The idea that they can spook speculators into bidding down the price of oil may work over the short-term. But unless the true causes of high oil prices (printing money and restricting U.S. drilling) are resolved, it will just be a momentary retreat.

The price of oil will reflect the true value of the dollar and the laws of supply and demand as restricted by Obama's drilling policies. Trying to spook speculators into bidding down the price of oil is not a strategy that will work over anything but the short-term.

In the long-term, market forces always win. Always. And since Obama's policies are not compatible with the free-market, Obama's policies will always lose. Always.

The Paradox Of Keynesian Economics

As I've written many, many times before--most recently yesterday--Keynesian and liberal economics is a thoroughly debunked economic ideology. It doesn't work.

The fact of the matter is that Obama's implementation of liberal economic policies leads to the current paradox: Obama's government spending and intervention policies have led to higher prices in oil which Obama is now trying to counteract with government spending and intervention (in the oil market).

An economic model that actually worked wouldn't require an endless chain reaction of more and more unsustainable government policies to work. That Obama's policies require more policies to contain the damage of earlier policies is yet more evidence of the inherent failure of his liberal economic model.

In conclusion, the strategic petroleum reserve should be reserved for true emergencies--natural disasters and significant supply disruptions. While I agree that Obama's mishandling of the economy is an emergency, it will not be fixed by tapping the strategic petroleum reserve.

And even though Obama's economic policy may have multiple personalities that fight from day to day, American citizens will always be the losers.

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