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.
Last week’s 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 Tuesday paving the way for approval of new trade pacts with South Korea, Panama and Columbia 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 last week, with further declines to a little more than $90 a barrel in New York trading Monday before rebounding to about $93 on Tuesday.
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 last week’s 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 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 ends Thursday, which involved buying U.S. Treasury bonds in a bid to lower long-term 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 Petroleum Exporting Countries, which at a meeting this 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.