While the timing is puzzling, it could boost the economy during the summer months
"Why now?" -- that's the question many energy experts were asking after the Obama administration's surprise announcement that it plans to release 30 million barrels of oil from the country's Strategic Petroleum Reserve.
Senior administration officials told reporters that the multilateral decision, made as a part of a larger supply push with other nations in the International Energy Agency, is a response to lost supply due to the ongoing conflict in Libya. It was also intended as a preemptive move looking toward the summer driving season, when demand for oil and gas is expected to grow. But the timing of the decision still has puzzled many. After all, those same reasons would have been even more pressing months ago, before the economy had adjusted to the jolt of the Libya crisis that began in early February.
But timing aside, experts say the move is a short-term win for consumers, as the release of oil and its effect on gas prices could act as a small stimulus in an otherwise lagging national economy.
Oil and gas prices have been on a gradual downward slope since mid-May, when markets were most feeling the shocks of the disrupted supply from Libya. The administration's decision today could help that downward trend continue for at least a couple of months, says Chris Lafakis, an economist with Moody's.
According to Lafakis, while average national gas prices in May bordered on $4 per gallon, he guesses they could go down as far as $3.50 per gallon as a result of the decline that was already happening and the added oil supply from the Strategic Petroleum Reserves. That price drop, from the current average price of $3.61, is expected to be only temporary, he says. But the administration's decision could still have the same stimulative effect as a multibillion dollar tax cut for consumers around the country. "It's not like a game-changing, groundbreaking effect, but it will help," says Lafakis. "It's something that will allow the economy to grow faster than it otherwise would have."
Lower gas prices tend to have the most effect on lower-income people, who are more apt to spend their extra savings than save more. That extra spending could give the economy a short-term boost. According to Patrick DeHaan, senior petroleum analyst at GasBuddy.com, it won't change most people's driving habits, but they should notice the extra cash. "Gas prices are still so high, people aren't just going to go drive. The difference is small enough that people aren't making many changes yet, and they'll just keep the extra money in their pocket to spend elsewhere in the economy."
Lower gas prices also have a psychological effect on consumers, DeHaan says. "It changes their mood, and to see lower prices, it will certainly stimulate or make people excited," he says. "The psyche behind lower gas prices will certainly help the economy."
Not surprisingly, lawmakers, are taking advantage of the news to push their agendas. Republicans have used it as a hook to promote their drilling interests and the need for greater domestic oil supply. Democrats, on the other hand, are lauding the decision as proof of their party's commitment to fixing the economy, which on Wednesday took a hit as the Federal Reserve announced its estimates for lower expected growth through 2012 and jobless claims increased."We are sending a clear message to speculators: We stand with American consumers and businesses; we will keep working to alleviate their economic struggles; and we will place our families' interests ahead of Big Oil's bottom line," House Minority Leader Nancy Pelosi in a statement Thursday afternoon.
So, while there's bound to be debate about why the administration decided to release from the reserves and whether it's a good idea in the long term, the average consumer can rest assured that the immediate impact will be a bright spot for now.
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