No Time for Loose Talk on US SPR Refill

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Financial markets can be highly sensitive, particularly during times of disruption. One wrong word or announcement uttered or issued at the wrong time can create financial contagion with major consequences. Economists have coined the term “Minsky Moments” to describe “the point in time where a sudden decline in market sentiment inevitably leads to a market crash.” While the term is historically associated with financial crises, any financial market — including oil — can experience such a moment. US Energy Secretary Jennifer Granholm is guilty of risking a Minsky Moment in the oil market with her statement Thursday that the US will begin accepting bids this autumn to eventually buy 60 million barrels of crude oil to replace supply being taken out of the Strategic Petroleum Reserve (SPR) and sold this spring in an effort to calm markets. The contagion could spread to financial markets themselves.

Bloomberg’s Enda Curran wrote recently that a simple destabilizing event such as an increase in interest rates can send markets into crisis if investors demand cash. One of my teachers, Charles Kindleberger, devoted a book to the subject titled Manias, Panics, and Crashes: A History of Financial Crises. Originally published in 1978, it became a bestseller when it was reissued in 2008, the year of the great financial crisis.

The impacts of Granholm’s actions could spread to global financial markets, exacerbating what is already a very tense global financial situation. Granholm accomplished this feat by stating in an official press release that the Department of Energy (DOE) plans to buy oil for its SPR to replenish the stocks that are still being sold now as part of efforts to cool prices in global oil markets. Granholm’s action is the equivalent of starting a fire in a crowded theater and then screaming “fire.” It is possibly the most ill-conceived economic policy statement I have observed in over 50 years.

The step taken by DOE is a mistake even though CNN reports that the agency does not plan to buy oil for the SPR for perhaps two or three years. The secretary said in her press release: "As we are thoughtful and methodical in the decision to draw down from our emergency reserve, we must be similarly strategic in replenishing the supply, so that it stands ready to deliver on its mission to provide relief when needed most."

These words seem sensible and comforting on the surface. The secretary wants to assure the public that the DOE is working to stabilize prices today and that it will ensure it is able to again stabilize prices if needed in the future.

However, markets do not work that way. Markets react to headlines. Headlines can quickly build momentum. As a result, a well-intentioned statement can start a process which quickly gets out of control. This is why Federal Reserve Board Chairman Jerome Powel was so emphatic Wednesday that a 75 basis point (0.75%) increase in the Federal Funds rate — used by the Fed to influence flexible commercial lending rates of all sorts — was not on the table.

Precarious Positions

Oil markets today are in a very precarious position. Sanctions on Russia may remove 3 million to 4 million barrels per day of oil from world crude and product markets. Middle distillate markets worldwide are already facing an extreme physical shortage. At such times, those in positions of authority in financial markets understand that any statements which may incite additional buying in either physical or cash markets need to be avoided. At such times, every effort must be made to calm markets — not to excite them further.

The US government took exactly the correct steps when, in March, President Joe Biden announced that his administration would release over 180 million barrels from strategic stocks in order to moderate price pressures. Unfortunately, Granholm has now largely neutralized the positive impact of the earlier move.

A classic sentence by Milton Freedman explains the risk: “Because no great strength would be required to hold back the rock that starts a landslide, it does not follow that the landslide will not be of major proportions.” Granholm did not hold back the rock. She pushed the bounder down the hill. The US needs officials who are fluent and well informed about the workings of financial markets, not whose skills and experience are dominantly political.

Philip Verleger is an economist who has written about energy markets for over 40 years. A graduate of MIT, he has served two presidents, taught at Yale and helped develop energy commodity markets since 1980. Kim Pederson is editorial director of PKVerleger LLC. The views expressed in this article are those of the author.

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