Who Needs QE3, When We've Got Oil Reserves?
Last week the Federal Reserve strongly suggested that there would be no third round of quantitative easing, or QE3, leaving people wondering about the already-feeble growth in the U.S. economy when that stimulus goes away. Now we see what the broader government has in mind -- in the form of lower oil prices, brought about by dumping 30 million barrels of our rainy-day oil fund into the world supply. Who needs QE3 when you've got free oil?
To be honest, I didn't see the link in these two actions right away. And pardon me if I seem cynical about connecting the two. But the need, and the timing, and the effects are too well coordinated to be coincidental.
As I mentioned last week, there isn't as strong a case for a third round of quantitative easing at this point. The recovery is frustratingly slow, as Fed Chairman Ben Bernanke articulated, but much better than it was when the first two QEs were put in place: there's no apparent risk of deflation, and job creation is a lot better. So maybe there's not a case for keeping up such extreme measures.
What we didn't know was that the International Energy Agency, a group of oil-consuming nations which is a sort of anti-OPEC, and of which the U.S. is the biggest member, had been working on a deal to relieve the world oil markets of the shortage of supply brought about by the civil war in Libya. (Libyan crude oil is prized for its low sulfur content, and ease of refining into gasoline and diesel. Their usual capacity is about 2 million barrels a day.)
Thursday the IAE countries announced they would generously release 60 million barrels of their oil reserves into the world markets, 30 million of which would come from the U.S. (Our total reserves are something like 300 million barrels, and are supposed to be used only for a real crisis, not a temporary speed bump like Libya at the moment. But the Obama administration has the cover story of needing to participate in this globally-coordinated IAE thing.)
More supply to the markets, especially such a large amount suddenly plopped in, was a surprise, and prices in the world markets fell between six and eight percent Thursday and Friday, to below levels before the Arab uprising. (I can't reproduce a good chart here but it looks like Brent crude fell from $113 per barrel at the end of Wednesday to about $104 in the middle of Monday's trading.
How does this all tie together? In the Financial Times, markets writer James Mackintosh cites Goldman Sachs research estimating that recent oil price increases have taken about $120 billion out of the U.S. economy -- about as much as the December tax cuts put in. He adds:
The drop should help growth, with gross domestic product estimated to move 0.3-0.5 percent for every rise or fall in crude.So with extending extreme monetary policy into a QE3 not an option -- especially at a time when the Obama administration needs to do all it can to keep from adding to the federal debt load -- participating in the IAE's action to bring down oil prices is a brilliant tactic.
But the 60 million barrels is just a bit more than one month's worth of what Libya was producing in good times. (The world oil markets, and the world's appetite for oil, is enormous.) The price-chopping effect of this will run out quickly, and we'll be back to higher oil prices before long, and at that point without a QE3.
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