News of the IEA‘s release of oil reserves it taking top priority today, getting more coverage than Greece. Crude futures have plummeted, dropping below $90 a barrel at one point, and gas prices began to fall shortly after the news, both despite the fact that the 60 million barrels of reserve crude won’t be released for 2 to 6 weeks. But those are just the immediate effects, or are they?
Despite OPEC‘s decision not to increase production, crude has been dropping since well before today’s news. Weakness in the U.S. economy has led to low oil demand, which has manifested itself in dropping crude futures and even dropping gas prices, which were down before the news, 20 cents lower yesterday than last month’s average. Furthermore, the oil release is unlikely to have much of an effect, other than psychological, on oil prices. Sixty million barrels doesn’t come close to the amount of oil no longer coming out of Libya, and gas prices won’t approach pre-conflict levels unless the mess in Libya is cleaned up and they resume exporting, or OPEC decides to increase production to make up for shortages.
And while the news might seem good for consumers witnessing slightly lower prices at the pump, it’s not exactly helping the markets. Big oil has taken a huge hit today, with shares of Exxon Mobil (NYSE:XOM) and Chevron (NYSE:CVX), two of the thirty companies trading on the Dow Jones Industrial Average (NYSE:DIA), trading significantly down today and bringing the index with them, down nearly 200 points today.
Of course, the news can’t be all bad. The Nyse Arca Airline Index (XX:XAL) is up today. Fuel makes up one-third of airlines’ expenses, and now airlines that had already figured out how to turn a profit despite the increasing price of fuel by instituting new fees are looking at an even larger profit margin if input costs decrease. Any companies that have suffered lower net profits because of the increasing cost of transportation could also see a bump as fuel prices decline, the prospect of which could attract investors. Also, Americans are more likely to feel a boost than most other nations, because as the higher per capita consumer of oil, the boost to the economy will be proportionally greater.
Ultimately the IEA’s decision to release oil reserves is unlikely to resolve current shortages, and at best it is only a temporary fix. By the end of May, the unrest in Libya had removed an estimated 132 million barrels from the markets. The sixty million barrels being released by the IEA is not only less than half that number, but not even equivalent to one day’s worldwide oil consumption.
It seems likely the IEA released reserves not to make up for shortages, but to give the economy a boost by temporarily pushing down gas prices. It would certainly be a reason for Obama to O.K. the deal, as gas prices almost seem directly linked to a candidate’s approval ratings.
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