Analysis

The G8 Preparing for the Next Oil Price Shock

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Washington, D.C.--(ENEWSPF)--May 18, 2012.  The Group of Eight summit, hosted by the United States, will begin today at Camp David, and the Center for American Progress released “Preparing for the Next Oil Price Shock,” which examines why a price spike could happen and how selling reserve oil could help bring down prices. Most of the G-8 nations have suffered from high oil and gasoline prices this year, which undermines economic growth, particularly for nations that import a significant portion of their oil.

Future price spikes this year, which are possible, could derail the lumbering worldwide economic recovery. To prevent this occurrence, Reuters reports that, “U.S. President Barack Obama will seek support to tap emergency oil reserves from other Group of Eight leaders.” Hopefully President Obama will attempt to reach such an agreement with the G-8. A rapid oil price escalation or supply disruption could devastate the G-8’s struggling economies, but selling some reserve oil could stave off economic disaster if it is done right. Previous reserve oil sales in the United States temporarily reduced oil and gasoline prices, which provided some short-term relief to businesses and families.

Selling reserve oil reduces prices by putting a large amount of oil into the marketplace all at once. This can burst a “speculative bubble” that can raise oil prices when Wall Street speculators bid the price up by betting that future oil prices will rise. This drives commercial-end users of oil (such as airlines) to buy oil futures now to lock in a future price out of fear that the price will continue to rise. This action has the effect of bidding up oil futures prices even further. An analysis by McClatchy found Wall Street speculators expanded the oil price bubble this year, exploiting fears of Persian Gulf supply disruption.

Such oil price volatility wreaks havoc with tight government, business, and family budgets because frequently these budgets do not have the additional funds necessary to pay for higher fuel costs. In addition, higher oil prices slow economic growth by removing money from the economy that would otherwise pay for other goods and services. For instance, every $10 increase in the price of oil slows economic growth by 0.2 percent in Organisation for Economic Co-operation and Development nations, which includes all the G-8 nations except Russia.

Hopefully, President Obama will recruit our allies this weekend to commit to sell a relatively small amount of reserve oil to protect the middle class on both sides of the Atlantic, should another oil price spike occur.

Source: americanprogress.org