Saturday, June 25, 2011

Obama's Release of Oil from the SPR

I needed to noodle the release of Oil from the U.S. Strategic Petroleum Reserve for a few days (and I have been under the weather... which tends to slow my noodling).  CNNMoney had this not too dumbed down article recently:

Four reasons are emerging for President Obama's surprise decision Thursday to release 30 million barrels of oil from the nation's strategic reserve -- economic stimulus; a looming supply shortage; a wake up call to OPEC; and a warning shot to speculators in the oil market.
I think that that line of reasoning is essentially correct... so lets take it apart one item at a time, but in reverse....

1. "A warning shot to speculators in the Oil market." Hmmmm..... This is so wrong on sooooo many levels... but OK, we live within a body politic filled with dingbats and dumbbells... true believers and complete deniers... wing nuts and fruit loops.... Here's my take:

Our command economy control freaks have undertaken an incredible effort to stimulate the economy (most of these efforts are doomed to fail or have a cost/benefit ratio f***ed up beyond recognition). Some of this attempt at command and control had some unintended consequences - just take a look at the US$ - and so the control freaks think they can micro manage aspects of their efforts to increase speculative activity that they find unappealing - even if there is only (and barely) circumstantial evidence that the original efforts to increase risk appetite were the driver behind Oil prices - by driving out speculators??  After all, energy was one of the worst performing sectors in the commodity markets... WhoTF is advising these people? Commodity trading is a Zero Sum Game. For every buyer there is an equal and opposite seller. The market price will ALWAYS get to equilibrium eventually via the supply/demand price discovery between producers and consumers. Reducing the number of trades in between Exxon and Mrs. Smith will absolutely, positively not change the AVERAGE outcome of price... it WILL, however, increase the volatility in the market price... which might have the unintended consequence of reducing risk taking at the Exploration and Production level.

Politically, these knuckleheads have been able to label "speculators" as the evil doers... so this might appeal to the non-thinking viewers of the likes of Oprah and Nancy Grace.

2. "A wake up call to OPEC". ROFL!!! OPEC is keenly aware of their precarious position - there ain't a damn thing they can do about it. IF, and its a BIG IF, OPEC has ANY spare capacity at the moment it almost assuredly is in The Kingdom of Saudi Arabia, and KSA has already said they are going to increase production... my bet is that that was just propaganda... and we will know the truth soon enough.

I am quite sure that a "Wake up call to OPEC" was not part of the administrations thinking... or at least I hope not. While the ruling OPEC's elite might benefit from selling the West and the BRIC's their oil as fast as they possibly can... under NO CIRCUMSTANCE is this in the interests of the PEOPLE living in the OPEC countries. The West's ongoing War with Islam has been the predictable result, and the Arab Spring is just the latest chapter in this ongoing saga.

3. "A looming supply shortage". We need a definition for "shortage". There will be no shortage of $150, or $200, or $300 per barrel Oil... and no $100 per barrel Oil to be found. There will be no "shortages" unless governments attempt to ration by inconvenience.  If "rationing" occurs by price, the market will handle everything... now you might not like that; you might have to drive fewer miles and in a smaller car and live in a smaller dwelling and grow your own food and share bath water... amongst all manner of other adjustments. But you will adjust. The problem for the Federal, State and local governments is that this will simply destroy their budgets. The good news is that the "smaller government" folks are going to win by default without having to throw a single punch.

4. "Economic Stimulus". This is just too silly to even address. The amount of Oil in the SPR might, MIGHT, get these folks through the 2012 elections... and then what? Is our economy "stronger" by destroying contingency funds? "I fart in the general direction" of this one.

In the final analysis, this is just another cluster f*** coming out of the 2 Headed 1 Party (2H1P) Monster that has been eating us alive since the end of the Civil War... but the fat is gone, the muscle is gone, and the Monster is gnawing at the bone of the U.S. Strategic Petroleum Reserve.


Peak Oil is unfolding pretty much on schedule. Peak Oil was never going to be an overnight kind of Tsunami thing-a-ma-jig.  Over the next 10 years the world will become a very, very different place... and over the next human lifetime things will be every bit as interesting as say, the 75 years from 1925 to 2000. The slow grind of Peak Oil simply will not enjoy a rate of change that will satisfy the recreational doomer. For thinking people, not to worry. Stick around. The end of growth and then outright contraction in Oil supply is going to put a rocket in the pocket of the economic/political environment. 


russell1200 said...

Wall Street Journal had it on the front page yesterday.

Clearly this is timed for the next election.

In the long term they want prices high so that any alternative technologies that might be dreamed up have less of a competitive hurdle. A lot of momentum on oil substitution from the 1970s-1980s was lost when prices came back down.

PioneerPreppy said...

If it for the election it is premature thats for sure. Less than two days supply will be gobbled up and forgotten about in a month.

Personally I am cheering for Greg's number 3!!!

westexas said...

It looks like there are some real supply issues in Europe, because of the disruption in Libyan oil exports, and I think that the IEA was definitely worried about the fourth quarter.   Basically, I think that there was a real concern that there would not be sufficient supplies to meet demand--at current prices, i.e., we would have to see continued price increases to balance flat to declining global net exports against demand.  In other words, we would have to have a higher price in order to kill off more demand, and the OECD countries don't want to see higher prices. 

In addition, if we compounded rising prices with the markets' acknowledgement  that the Saudis probably can't materially increase their net oil exports, at least their exports of light/sweet crude, it would result in "interesting" times in the second half of the year. 

I wonder if Saudi Arabia might be the key to this whole thing. My initial impression was that the release of emergency supplies was a vote of no confidence from the IEA regarding Saudi Arabia's ability to increase net oil exports, and that may be the case, but it also occurred to me that the release of emergency supplies may allow Saudi Arabia to claim that additional Saudi oil is not needed, given the release of emergency supplies. If Saudi Arabia can't materially increase their exports of oil, especially light/sweet oil, then the release of emergency supplies would be a very convenient fig leaf for them.

Note that the five year numbers for Saudi Arabia don't look good regarding their future net export capacity. Their consumption to production ratio (C/P) rose from 18% in 2005 to 28% in 2010 (BP). At this rate of increase in the C/P ratio, they would approach a 100% C/P ratio (and thus zero net oil exports) in only 14 years, around 2024. 

I am somewhat surprised that the BP data base showed another year over year decline in Saudi net oil exports, from 7.3 mbpd in 2009 to 7.2 mbpd in 2010 (versus 9.1 mbpd in 2005).  It makes one wonder just how much of the 2009 decline in Saudi net oil exports was truly "voluntary."  Note that Saudi Arabia has shown year over year declines in net oil exports for four of the past five years. 

westexas said...

A couple of links:

Commercial crude inventories in the US are fine, but the WSJ reported that commercial crude inventories in Europe are at five year lows:
World Oil Reserves Tapped


"The loss of Libyan crude, which is light and sweet and has proved difficult to replace, has led to tightness in oil markets, especially in Europe, Libya's main market. European commercial crude stocks are now at five-year lows."

And a related article:
Oil and the Strategic Petroleum Reserve: Prices are Headed Higher


"The move to release oil from the SPR is a tacit admission that the speculation argument is rubbish. After all, if the rally in oil is all about speculators and the world is truly awash in oil, then adding an additional 2 million barrels per day to that supply won't help the situation. It doesn't make sense to argue that this move is necessary to offset disruptions to Libyan oil exports, while also arguing that supply and demand have nothing to do with oil prices. . . 

The oil market is tighter globally than anyone wants to admit. In the IEA's most recent Oil Market Report (OMR), the agency predicted that global oil demand in 2011 will rise by 1.3 million barrels day compared to 2010 levels--that's on top of an increase of 2.8 million barrels per day in 2010. . . To make matters worse, we're entering a seasonally strong period for demand. The IEA stated that global oil demand will increase by 1 million barrels per day between the second and third quarters of this year alone. This is due to the seasonal ramp in supplies that coincides with the summer driving season in the Northern Hemisphere.  Projections from the IEA and the US Energy Information Administration showed that without much additional OPEC supplies, global commercial oil inventories would decline sharply through the summer amid the ramp-up in demand. Global oil inventories would have thinned substantially by the fourth quarter. . . 

In short, the decision to release 60 million barrels of oil from global SPRs partly a political move designed to bring down oil prices ahead of the summer driving season. That may work over the next few weeks. But the more important point is that it reflects how tight the global oil market has become and that meeting global oil demand growth will require an unacceptable decline in global spare capacity."

Greg T. Jeffers said...


I am rooting for item 3, too... but I don't think this outcome needs our help... this is unfolding as we speak, and will continue to do so at its own pace. We need do nothing drastic. Just enjoy the view.

dennis the menance said...

Releasing oil from the SPR not a bad idea.

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