"It is obviously a relief that OPEC has finally agreed to increase production, and the Administration deserves credit for convincing OPEC to do something that many members were not inclined to do. But the question remains: is this increase sufficient to lower gas and oil prices or does it fall short of the mark? And the bottom line is that it is too soon to celebrate.
"In total, between OPEC and non-OPEC producers, the amount of new oil coming on to the market is about 1 million barrels per day over current levels. At best, this will mean prices will plateau or ease slightly from today's record highs. So the jury is still out on whether this agreement is really a watershed or not.
"One thing that is clear is that the agreement will certainly not increase inventories substantially, if at all. That leaves us in the precarious situation where one small disruption could send prices soaring again. Last winter it took one brief cold snap in the northeast to send heating oil prices to new records. This spring, all it would take is a temporary shutdown of a major refinery to lift gas prices above $2.00 per gallon.
"So my policy recommendation is to wait a few weeks to see how the markets react to the agreement. And we should also wait to see if there is some additional production beyond the agreement. In short, if after this period of watchful waiting prices remain high and inventories continue to dwindle, then we should immediately release the SPR. If prices settle in at a more reasonable $20 to $25 per barrel range, then I would say that we are at least temporarily out of the woods. Within a few weeks the market will tell us whether this agreement is more or less than meets the eye.
"In the long term, we also should slowly increase the size of the SPR and quickly put in place a mechanism that allows the Administration to use it when supply squeezes threaten our economy. A well-stocked SPR is our best defense against OPEC supply quotas that threaten the western economies. I am convinced that the threat of releasing the SPR helped the Administration achieve the production increase from OPEC.