WSJ.com - Katrina, Oil and the Fed
WSJ.com - Katrina, Oil and the Fed
September 1, 2005
The economic damage from Hurricane Katrina will take months to sort out, but it's not too soon to sort the good from the bad among possible government responses. The first rule of policy in a disaster should be to do no more harm.
In the category of good is the Bush administration's decision yesterday to release some oil from the Strategic Petroleum Reserve to help Gulf Coast refiners keep operating. With oil supplies reduced, the refiners need to borrow the SPR crude or they might have to shut down. The companies will return the borrowed oil to the Reserve when private supplies are back to normal.
The administration is also right to resist the temptation to go further and flood the market with Reserve crude, even if that would look good politically. "The President is willing to do what it takes to relieve an oil company, but not enough to relieve the crushing burden of oil speculation and price-fixing on American consumers and small businesses," declared Congressman Ed Markey, thus taking the prize as the first Member of Congress to exploit this natural disaster for partisan gain. His staff should tell the Massachusetts Democrat that releasing more crude won't affect prices at the pump by one penny if the oil can't be refined into gasoline.
Far more likely to reduce gas prices is yesterday's timely decision by the Environmental Protection Agency to suspend temporarily some pollution standards on gas and diesel fuel to ease shortages. One cause of generally higher gas prices that isn't well understood by the public is the proliferation of "boutique" fuels to meet anti-pollution rules passed by Congressmen like Mr. Markey. These require special refining capacity, and with the shutdown of at least eight refineries it makes sense to ease these rules given the more urgent need to rebuild fuel supplies.
Even better, the EPA waived the rules for all 50 states, not just those directly hit by the hurricane. This recognizes that Katrina will end up affecting gas prices nationwide because of shortages and delivery delays, so 50-state relief ought to reduce the number of local price spikes. We wish the EPA had extended the waivers beyond September 15, but at least that's the day the EPA's requirements for summer-fuel blends expire and the industry may have winter fuel stocks ready to go.
Which brings us to Katrina's impact and the Federal Reserve. The airwaves yesterday were full of suggestions -- pleas, really -- that Katrina's damage should cause the Fed to stop its slow and steady path of monetary tightening. Philadelphia Fed President Anthony Santomero even encouraged this wishful thinking by hinting to CNBC that this wasn't out of the question.
Now, one of the Fed's duties is to provide financial liquidity in a crisis. But while Katrina is a human calamity with economic consequences, it is not so far a financial crisis. Oil prices have spiked above $70 a barrel in anticipation of reduced supplies. But the Fed policy would only cause prices to rise further if it printed more money that would end up chasing scarcer supplies. This is precisely the trap the Fed fell into in the 1970s, easing money to help the economy offset rising oil prices, only to cause oil prices to spike again. The cycle kept repeating itself and the result was stagflation.
Chairman Alan Greenspan's Fed has already contributed to higher oil and commodity prices by keeping monetary policy too loose for too long in 2003 and 2004. This is beginning to show itself in rising consumer prices this year and is likely to continue to do so in the coming months. The last thing the Fed should do now is give the world's investors the idea that it can be bumped from its anti-inflation resolve by an act of nature, even one as destructive as Katrina.
Unlike September 2001, the economy has considerable underlying strength. Katrina will no doubt reduce its growth in the third quarter but that might also lead to a rebound in the fourth. Any sign that the Fed has gone soft today will only mean that interest rates will have to go that much higher in 2006 to head off any inflationary expectations.
The damage from Katrina has been painful to watch, and the government is properly doing what it can to relieve the immediate suffering and restore order. But one virtue of our market economy is that it is dynamic and flexible enough to respond and recover, as long as political leaders give it the opportunity.
September 1, 2005
The economic damage from Hurricane Katrina will take months to sort out, but it's not too soon to sort the good from the bad among possible government responses. The first rule of policy in a disaster should be to do no more harm.
In the category of good is the Bush administration's decision yesterday to release some oil from the Strategic Petroleum Reserve to help Gulf Coast refiners keep operating. With oil supplies reduced, the refiners need to borrow the SPR crude or they might have to shut down. The companies will return the borrowed oil to the Reserve when private supplies are back to normal.
The administration is also right to resist the temptation to go further and flood the market with Reserve crude, even if that would look good politically. "The President is willing to do what it takes to relieve an oil company, but not enough to relieve the crushing burden of oil speculation and price-fixing on American consumers and small businesses," declared Congressman Ed Markey, thus taking the prize as the first Member of Congress to exploit this natural disaster for partisan gain. His staff should tell the Massachusetts Democrat that releasing more crude won't affect prices at the pump by one penny if the oil can't be refined into gasoline.
Far more likely to reduce gas prices is yesterday's timely decision by the Environmental Protection Agency to suspend temporarily some pollution standards on gas and diesel fuel to ease shortages. One cause of generally higher gas prices that isn't well understood by the public is the proliferation of "boutique" fuels to meet anti-pollution rules passed by Congressmen like Mr. Markey. These require special refining capacity, and with the shutdown of at least eight refineries it makes sense to ease these rules given the more urgent need to rebuild fuel supplies.
Even better, the EPA waived the rules for all 50 states, not just those directly hit by the hurricane. This recognizes that Katrina will end up affecting gas prices nationwide because of shortages and delivery delays, so 50-state relief ought to reduce the number of local price spikes. We wish the EPA had extended the waivers beyond September 15, but at least that's the day the EPA's requirements for summer-fuel blends expire and the industry may have winter fuel stocks ready to go.
Which brings us to Katrina's impact and the Federal Reserve. The airwaves yesterday were full of suggestions -- pleas, really -- that Katrina's damage should cause the Fed to stop its slow and steady path of monetary tightening. Philadelphia Fed President Anthony Santomero even encouraged this wishful thinking by hinting to CNBC that this wasn't out of the question.
Now, one of the Fed's duties is to provide financial liquidity in a crisis. But while Katrina is a human calamity with economic consequences, it is not so far a financial crisis. Oil prices have spiked above $70 a barrel in anticipation of reduced supplies. But the Fed policy would only cause prices to rise further if it printed more money that would end up chasing scarcer supplies. This is precisely the trap the Fed fell into in the 1970s, easing money to help the economy offset rising oil prices, only to cause oil prices to spike again. The cycle kept repeating itself and the result was stagflation.
Chairman Alan Greenspan's Fed has already contributed to higher oil and commodity prices by keeping monetary policy too loose for too long in 2003 and 2004. This is beginning to show itself in rising consumer prices this year and is likely to continue to do so in the coming months. The last thing the Fed should do now is give the world's investors the idea that it can be bumped from its anti-inflation resolve by an act of nature, even one as destructive as Katrina.
Unlike September 2001, the economy has considerable underlying strength. Katrina will no doubt reduce its growth in the third quarter but that might also lead to a rebound in the fourth. Any sign that the Fed has gone soft today will only mean that interest rates will have to go that much higher in 2006 to head off any inflationary expectations.
The damage from Katrina has been painful to watch, and the government is properly doing what it can to relieve the immediate suffering and restore order. But one virtue of our market economy is that it is dynamic and flexible enough to respond and recover, as long as political leaders give it the opportunity.
posted by Marcel at 2:25 AM
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