In the shadow of the Iran war, with crude hovering around $100 a barrel, the allure of finding a quick fix to energy inflation is understandable. But intervening directly in the financial markets by taking a bearish short position in oil — which the US Treasury says it’s been discussing — would be a terrible idea. Economics and history both scream the same message: The US shouldn’t do it.
Selling oil futures would be a desperate ploy, born of panic about rising US gasoline and diesel retail prices ahead of the midterm elections. History is littered with American politicians who thought they knew better than the market. Remember the 1970s when President Richard Nixon imposed energy price controls after the first oil crisis? It didn’t lower prices, but it brought shortages and mile-long lines at gas stations.
The oil futures and options market isn’t a casino where the US government can self-appoint itself as the house that always wins. It’s the beating heart of the energy industry, where Texas oil producers go to hedge their price exposure, Asian refiners lock in costs and everyone else can take a view. The oil price is set every day by millions of transactions in the physical and derivatives markets, each with a different opinion about supply, demand and inventories. The government’s role is to safeguard that process, not distort it.
Commodity markets thrive on transparency and rules-based trading. When Uncle Sam steps in, it erodes confidence — investors flee, liquidity dries up, price discovery moves into the shadows and hedging becomes costlier. Terry Duffy, the chief executive officer of CME Group Inc., the platform for the largest oil derivatives market where West Texas Intermediate trades, said earlier this month that intervention would be a “biblical disaster.”
Trying to steer oil prices is different to influencing currencies or interest rates; there, the government can print dollars. Say the US was to short oil via a trade involving futures, options or, more discreetly, swaps. It would be selling a piece of paper, the equivalent of an IOU in the energy world. Even in the best scenario, any resulting price drop would only be temporary as selling paper barrels doesn’t create physical barrels that refiners can buy. In the worst case, it would expose American taxpayers to huge losses if prices moved against the government.
The Biden administration also considered intervening in the financial oil market after prices soared to $125 a barrel following the Russian invasion of Ukraine. The idea was quickly abandoned — and rightly so.
For several days earlier this month, speculation was rampant that the US was thinking about shorting oil futures. In private, US officials acknowledged it was one possibility, alongside tapping the country’s Strategic Petroleum Reserve and easing energy sanctions on Russia. On March 13, US Interior Secretary Doug Burgum publicly confirmed it was a live option. “I would say there has been a discussion,” he told Bloomberg TV. “We have a lot of smart people working in this administration – a lot of smart people work in the energy trading market.” In his own words, the plan was “an intervention to try to manipulate and lower prices.”
Credit to Burgum for calling it what it would be — manipulation. Credit, too, for expressing doubts about the plan’s feasibility, noting that it would “require enormous amounts of capital.” Treasury Secretary Scott Bessent was even more skeptical, telling CNBC on Monday he was “not sure under what authority or what auspices” an intervention could take place. In any case, “we haven’t done” it, he told CNBC. That wasn’t enough to convince many oil traders, who noted Bessent hadn’t ruled out an intervention; after all, he said “we haven’t” rather than “we won’t.”
Perhaps the administration wants that useful ambiguity to persist — another tool in its jawboning arsenal. By talking for several days about potential intervention, first by privately reaching out to bankers and traders and then going public, officials have probably succeeded in curbing the surge in oil prices. Let’s hope that’s all they want to do.
The Trump administration may ultimately abandon the possibility of intervention. But it’s still trying to shape the curve of the financial oil market via a novel use of the country’s strategic reserves. In previous emergency use of the SPR, the White House simply sold the barrels; this time, it’s structured the release as a loan. Whoever wins the auction for the barrels will have to return them, with interest, by 2027-2028. The net result is that short-term oil prices are falling, but long-term prices have risen, as traders anticipate the extra demand to return to barrels into the SPR. The oil curve has flattened, in an echo of the Federal Reserve’s methods of flattening the US interest rate curve.
It’s another unwelcome indication the American government seems more focused on making a buck than in solving the underlying supply crunch the war has created; the role of those “smart people” described by Burgum is to re-open the Strait of Hormuz. If they want to trade oil, they shouldn’t do it using America’s balance sheet.
This report is auto-generated from Bloomberg news service. ThePrint holds no responsibility for its content.
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