Stim­u­lus mea­sures seek growth with­out spend­ing

The Washington Times Weekly - - Politics - BY PA­TRICE HILL

Stuck with a glacial pace of eco­nomic re­cov­ery and lit­tle like­li­hood that Congress will ap­prove more stim­u­lus, the White House has been re­sort­ing to some un­con­ven­tional mea­sures to try to boost growth.

The re­cent de­ci­sion to join other oil-con­sum­ing na­tions in re­leas­ing 60 mil­lion bar­rels of pre­mium crude onto world mar­kets to lower the price of fuel was widely viewed in eco­nomic cir­cles as a first ef­fort of that kind to stim­u­late the global econ­omy. High fuel prices have been drag­ging down eco­nomic growth as well as the po­lit­i­cal prospects for in­cum­bents from Wash­ing­ton to Tokyo.

The White House also has been tak­ing ad­van­tage of a weak­en­ing dol­lar to scale up gov­ern­ment ef­forts to pro­mote ex­ports, travel to the United States and in­vest­ment in the U.S. by for­eign busi­nesses that cre­ate jobs, all ways to en­cour­age growth with­out spend­ing bil­lions of tax­payer dol­lars. A deal with con­gres­sional lead­ers on June 28 paving the way for ap­proval of new trade pacts with South Korea, Panama and Colom­bia was part of those ef­forts. But the oil ploy struck econ­o­mists as the most novel and po­ten­tially ef­fec­tive, yet con­tro­ver­sial, move thus far.

The re­lease from the U.S. and for­eign Strate­gic Pe­tro­leum Re­serves seems to have worked, prompt­ing an im­me­di­ate and dra­matic $5 drop in pre­mium crude prices two weeks ago, with fur­ther de­clines to a lit­tle more than $90 a bar­rel in New York trad­ing June 27 be­fore re­bound­ing to about $93 on June 28.

Those lev­els, if sus­tained, could yield as much as a fur­ther 25-cent drop in gaso­line pump prices to as low as $3.40 a gal­lon on av­er­age in com­ing weeks, an­a­lysts say, in what would be a dra­matic drop from the peak near $4 reached in late May.

“These lower gas prices should help bol­ster con­sumer spend­ing” and lift growth in the sec­ond half of the year, said David Kelly, chief mar­ket strate­gist at J.P. Mor­gan Funds. A drop in oil and gas prices acts as a kind of a tax cut for con­sumers and busi­nesses be­cause it leaves them with more cash to spend on other things.

Con­sumer spend­ing has been par­tic­u­larly hit hard by the jump in gas prices to near-record lev­els this spring, with growth in per­sonal spend­ing com­ing to a near halt in April and May as peo­ple paid more at the pump, The con­sumer slump, in turn, has crimped over­all eco­nomic growth, leav­ing it chug­ging along at a tepid 2 per­cent pace that does lit­tle to in­spire con­fi­dence or cre­ate job growth.

While the drop in gas prices should perk up spend­ing in com­ing months, an­a­lysts cau­tion that the ad­min­is­tra­tion’s gam­bit also could back­fire de­pend­ing on how the oil mar­ket re­acts to the con­tin­u­ing threat of re­leases from the oil re­serves in com­ing months.

“The soft patch, not just in the U.S., but glob­ally, is jan­gling politi­cians’ nerves,” and that is what led to [the] sur­prise move by the U.S. and 27 other oil-con­sum­ing na­tions that are mem­bers of the In­ter­na­tional En­ergy Agency, said Pa­trick New­port, an an­a­lyst at IHS Global In­sight.

“Time will tell whether that ex­tra stim­u­lus is worth the risk of cre­at­ing the per­cep­tion that

While the drop in gas prices should perk up con­sumer spend­ing, an­a­lysts cau­tion that the ad­min­is­tra­tion’s gam­bit also could back­fire de­pend­ing on how the oil mar­ket re­acts to the con­tin­u­ing threat of re­leases from the oil re­serves in com­ing months.

the IEA is try­ing to ma­nip­u­late the price rather than re­spond­ing to a sup­ply dis­rup­tion.”

Mr. New­port and other an­a­lysts noted the un­usual tim­ing of the an­nounce­ment, more than four months af­ter civil war dis­rupted oil sup­plies from Libya, which was cited as the rea­son for the re­lease, but only one day af­ter global mar­kets started swoon­ing in re­sponse to a de­ci­sion by the Fed­eral Re­serve to do noth­ing fur­ther to ease in­ter­est rates.

That made it look as though the move was de­signed to aid the economies and mar­kets, rather than counter an emer­gency dis­rup­tion in oil sup­plies, econ­o­mists said.

The pe­cu­liar tim­ing of the an­nounce­ment prompted Paul Horsnell of Bar­clays Cap­i­tal to dub the oil re­lease “the QE2 of oil,” in a play on the widely used de­scrip­tion for the Fed’s quan­ti­ta­tive eas­ing or “QE2” pro­gram that ended June 30, which in­volved buy­ing U.S. Trea­sury bonds in a bid to lower longterm in­ter­est rates.

The 140-mil­lion-bar­rel short­fall of pre­mium crude from Libya has been build­ing for months, he said, but the worst ef­fects on mar­kets al­ready were over, with oil prices hav­ing de­clined $15 from peaks of more than $110 a bar­rel reached in mid-May.

Be­sides try­ing to boost the global econ­omy at a crit­i­cal time, Mr. Horsnell said, the in­ter­na­tional en­ergy agency may have had its hand forced by the Or­ga­ni­za­tion of the Pe­tro­leum Ex­port­ing Coun­tries, which at a meet­ing last month re­fused to in­crease world oil sup­plies de­spite pleas from oil-con­sum­ing na­tions and a veiled threat from the IEA to “use all tools that are at the dis­posal” of mem­ber na­tions.

Kevin Book, man­ag­ing di­rec­tor of ClearView En­ergy Part­ners, noted that it was the first time the world’s strate­gic re­serves have been used to try to counter a global slow­down as well as sur­prise and dis­cour­age spec­u­la­tors in the oil mar­ket who were bet­ting on fur­ther rises in oil prices.

“That’s a big change,” he told Platts En­ergy Week, pre­dict­ing that the move will leave more cash in con­sumer hands to spend and boost the econ­omy while also low­er­ing the bill that gov­ern­ments pay for fuel. That helps the U.S. and other na­tions cut their bud­gets. The U.S. De­fense Depart­ment, for ex­am­ple, is the world’s largest sin­gle con­sumer of oil.

The eco­nomic and bud­getary ef­fects of the move “may be the big­gest rea­son for do­ing it,” Mr. Book said. But he nev­er­the­less crit­i­cized it as “a re­ally dumb idea,” like “sell­ing your in­surance pol­icy to go gam­bling,” be­cause the re­serves were es­tab­lished to pro­vide a buf­fer in times of na­tional emer­gency.

An­other rea­son for the move, he noted, is that the world is fac­ing a par­tic­u­larly acute short- age of the kind of light, sweet crude pro­duced by Libya, which is the same kind of crude stored in the U.S. strate­gic re­serves in Texas and Louisiana in un­der­ground salt for­ma­tions.

“There’s a qual­ity prob­lem,” that was caus­ing par­tic­u­larly high prices for scarce pre­mium crude, and that could have been re­solved in only two ways, he said: ei­ther by se­cur­ing peace in Libya so it can re­sume its oil ex­ports, or build­ing more com­plex and ex­pen­sive re­finer­ies that have the ca­pac­ity to turn heavy, sour crude pro­duced by Saudi Ara­bia and other na­tions into the clean, pre­mium grades of gaso­line needed in the U.S. and other coun­tries.

Since build­ing re­finer­ies can take years, West­ern na­tions opted for the quick fix of re­leas­ing pre­mium crude from re­serves.

“The big ques­tion is how long do you want to keep in­ject­ing high-qual­ity oil at great se­cu­rity and fi­nan­cial ex­pense into the global sys­tem to keep this ar­ti­fi­cial ef­fect of sup­ply­ing that high-qual­ity oil in place,” Mr. Book said.

Randa Fahmy Hu­dome, a con­sul­tant and for­mer U.S. Depart­ment of En­ergy of­fi­cial, said the U.S. ini­ti­ated the move to re­lease strate­gic re­serves, even though the short­age of Libyan crude has been felt most acutely in Europe. The U.S. is pro­vid­ing half of the 60-mil­lion-bar­rel re­lease.

“The United States is re­ally driv­ing this with se­cret, be­hind the scenes diplo­matic dis­cus­sions to try to get pro­duc­ers to in­crease pro­duc­tion,” she told Platts. “And when that didn’t hap­pen, it launched a lob­by­ing ef­fort to have the IEA match us here in the United States with the 30 mil­lion [bar­rel] re­lease.”

The White House has clear po­lit­i­cal mo­ti­va­tions, she added. U.S. oil ter­mi­nals, which al­ready are well-sup­plied com­pared with Euro­pean ter­mi­nals, will be flooded with oil at the height of the sum­mer driv­ing sea­son, putting a sub­stan­tial damper on prices.

“Pres­i­dent Obama, go­ing into the 2012 elec­tion, re­al­izes one of the big­gest fac­tors in the eco­nomic down­turn is gas prices,” Ms. Hu­dome said. “Con­sumers are very un­happy about that.”

But she ques­tioned whether the re­lease will have a last­ing im­pact on oil prices. The IEA has in­di­cated that it may re­lease more oil if short­ages con­tinue and prices es­ca­late again.

Barclay’s Mr. Horsnell said the re­lease could back­fire by an­ger­ing oil pro­duc­ers and, in par­tic­u­lar, mak­ing Saudi Ara­bia more re­luc­tant to in­crease pro­duc­tion to make up for the short­fall of Libyan oil.

Saudi Ara­bia, the world’s largest pro­ducer and the one with the most spare ca­pac­ity, has not re­acted pub­licly to the re­lease of re­serves, but other OPEC mem­bers, led by Iran, have ob­jected and de­manded that it be stopped.

ASSOCIATED PRESS

Go­ing down: Con­ve­nience story owner Floyd Bis­son, low­ers the price of reg­u­lar gas at the pumps in front of his store in Phipps­burg, Maine on June 27.

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