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Oil Prices May Drop When Clinton Stops Talking  
Date: September-08-2000


New Canaan, Connecticut, Aug. 30 (Bloomberg) -- The best cure for high prices is high prices. Too bad President Bill Clinton doesn't believe this applies to oil.

Clinton has morphed himself into the oil-supplier-in-chief. The president has decided to spend his final months in office attacking oil companies and pressuring Third World oil producers into putting more supply on the market. Someday we are going to pay the price for his meddling in the market for energy.

Is it working? I think not. The engines on Air Force One hadn't cooled from Clinton's return from Nigeria and other African nations yesterday when the price of oil was already a dollar per barrel higher than it was when he left on Friday. So far this year, crude oil prices are up 28 percent. And U.S. crude oil inventories are near a 24-year low. For all of Clinton’s grandstanding, the problem gets worse. None of this is a coincidence.

Every time Clinton or someone from his administration sounds off about oil prices being too high, or does something like write a letter to the likes of Crown Prince Abdullah of Saudi Hrabia, he takes supply off of the market. It is true that he might be able to strong-arm the Saudis into pumping more oil. But that would be a short-run fix only.

Producer's Choice

Expectations rule markets. So, here is the question: Suppose you are an oil producer or refiner and you see the price of oil rise. Under which of the two scenarios would you bring more oil to the market.

Scenario A:

The price of oil goes up and nobody says a word.

Scenario B:

The price of oil goes up and the U.S. president calls for an investigation and then gets on his jet to go visit an oil producing country to beg for more production.

Clinton is opting for scenario B and by so doing he is ripping the guts out of what ordinarily would be a supply response. Every time he opens his mouth he, telegraphs a message to oil producers and consumers everywhere. That message is that if he can have his way, the price of oil will return to what he calls the ''ideal'' range of $20 to $25 a barrel. Never mind that he pulled these numbers out of the air.

Then there is the old paper tiger, the nation's Strategic Petroleum Reserve of oil and petroleum products. Last month, Clinton ordered Energy Secretary Bill Richardson to exchange crude oil from the reserve for as much as 2 million barrels of heating oil. "Winter may seem far off on this hot day,'' Clinton said on July 10, ''but if we don't do something now, reserve stocks of heating oil may not be in place before the cold weather comes.'' Mr. President, please stop thinking about tomorrow.

Role of Reserve

I can see a need for such a reserve but only in the short-run tactical defense sense. But that is not the purpose for the reserve. The intended function of the strategic reserve is to allow U.S. politicians to appear to be doing something every time the price of oil goes up. And it also lets them try to bluff foreign oil producers into lowering their price for oil.

Yet the principle is the same. If you want more oil to come to market, the last thing you should do is convince producers that there is a secret weapon, a strategic reserve, that can be brought to bear on the market. If you cap price expectations, you cap the supply response.

Moreover, you curtail the demand response as well. If consumers believe high prices are here to stay, they will make adjustments to their homes and automobiles. The demand for energy will be less at all prevailing prices if the market believes high prices are here to stay.

All things considered, the worst energy policy a president can adopt is one where he conveys to suppliers and consumers that he can put a lid on the price of oil.

Copyright 2000 Bloomberg LP. Reprinted with permission. All rights reserved.

 

Author: by David DeRosa

 

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