Crude proposal: The US shouldn’t try to rig oil prices by intervening as a short seller

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, such as President Richard Nixon who imposed energy price controls after the 1970s’ oil crisis. It did not 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 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. The CEO of CME, 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 from 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 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 America was thinking of 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 13 March, US Interior Secretary Doug Burgum publicly confirmed it was a live option. “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 noting that it would “require enormous amounts of capital.” Treasury Secretary Scott Bessent was more sceptical, 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 ambiguity to persist—another tool in its verbal 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.

This 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 has structured the release as a loan. Whoever wins the auction for those reserve barrels will have to return them, with interest, by 2027-2028.

The net result: 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, echoing the Federal Reserve’s methods of flattening the US interest rate curve.

It’s another unwelcome indication that the American government seems more focused on making a buck than solving the underlying supply crunch; the role of those “smart people” described by Burgum is to re-open the Strait of Hormuz. If they want to trade oil, they should not do it by using America’s balance sheet. ©Bloomberg

The author is a Bloomberg Opinion columnist covering energy and commodities.