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Did the IEA Just Deliver a QE3 Quick Fix?

Did the IEA Just Deliver a QE3 Quick Fix?

By Larry Kudlow - June 24, 2011

Did the International Energy Agency (IEA) just deliver the oil equivalent of Quantitative Easing 3?

The decision to release 2 million barrels per day of emergency oil reserves -- with the U.S. covering half from its strategic petroleum reserve -- is surely aimed at the sputtering economies of the U.S. and Europe following an onslaught of bad economic statistics and forecasts. This includes a gloomy Fed forecast that Ben Bernanke unveiled less than 24 hours before the energy news hit the tape.

I wonder if all this was coordinated.

The Bernanke Fed significantly downgraded its economic projections, blaming this forecast on rising energy (and food) prices as well as Japanese-disaster-related supply shocks. Of course, the Fed head takes no blame for his cheap-dollar QE2 pump-priming, which was an important source of the prior jump in energy and commodity prices. That commodity-price shock inflicted a tax on the whole economy, and it looks to be responsible for the 2 percent first-half growth rate and the near 4.5 percent inflation rate.

Bernanke acknowledged the inflation problem, but he didn't take ownership of that, either. Reading between the lines, however, the Fed's inflation worries undoubtedly kept it from applying more faux stimulus to the sagging economy with a third round of quantitative easing.

Somehow, the new Fed forecast suggests that the second-half economy will grow at 3.5 percent while it miraculously presses inflation down to 1.4 percent. But the plausibility of this forecast is low. It's almost "Alice in Wonderland"-like.

So, low and behold, the IEA and the U.S. Department of Energy come to the rescue.

Acting on the surprising news of a 60 million barrel-per-day crude-oil release from strategic reserves scheduled for July, traders slammed down prices by $5 to $6 for both West Texas crude and European Brent crude. That's about a 20 percent drop from the April highs, which followed the breakout of civil war in Libya in March. In fact, both the IEA and the U.S. DOE cited Libyan oil disruption as a reason for injecting reserves.

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Lawrence Kudlow is host of CNBC's The Kudlow Report and co-host of The Call. He is also a former Reagan economic advisor and a syndicated columnist. Visit his blog, Kudlow's Money Politics.

Copyright 2011, Creators Syndicate Inc.

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