Playing With The Strategic Petroleum Reserve
EconoSpeak: Playing With The Strategic Petroleum Reserve, Barkley Rosser
Over the last month crude oil prices have noticeably declined from in the neighborhood of $85-86 per barrel to $78-80 per barrel. But there has been only a very small decline in retail gasoline prices, and the headlines even as of yesterday was all about “sharply rising gas prices.”
So, Pres. Biden has moved to release a record amount of oil from the Strategic Petroleum Reserve, getting several other nations to also release such reserves, including UK, South Korea, Japan, Inda, and maybe even China. What was the result on crude oil markets? Not much. Brent slightly declined while WTI actually slightly increased, the markets perceiving this as largely a very short term move. Of course, Biden has also asked the FTC to look into oil prices not lowering retail prices after the crude oil price decline.
This reminds me of a tale I was told in the 1990s, during the Clinton admin, by a friend working on the Council of Economic Advisers staff. It involved a time when oil and gasoline prices had risen somewhat, although they were mostly quite low in that time period. The CEA Chair was Joe Stiglitz while the Chief of Staff was Leon Panetta, and they met with Clinton.
There had been public talk of releasing oil from the STPR to counteract this fairly small upsurge of prices. Stiglitz spoke against it, arguing it would have little effect on the markets, and furthermore, it looked like the markets would turn around on their own and push down the temporarily mildly elevated crude oil prices. Panetta’s response was, “Great! We can release some oil, not really disrupt the markets, but claim credit for the price decline when it happens! “Some oil got released with a bout of publicity.
So, maybe it is worth it for the publicity, even if it really has little actual effect on things.
we start this “playing with the Strategic Petroleum Reserve” with those supplies at an 18 1/2 year low….repeated tapping of our so-called emergency supplies for political expediency or to “pay for” other programs have already drained them over the past dozen years…it seems that it’s usually a safe bet that the emergency when they’ll be needed won’t occur when you’re still in office…
US commercial oil supplies, while 7% below the recent 5 year average, are still currently 27% higher than as of the 3rd weekend in November over the 5 years at the beginning of the past decade; so oil supplies shouldn’t really a problem; even so, the 2 1/2 day’s worth Biden is pulling out and adding to our commercial supplies is a drop in the bucket….gasoline supplies, on the other hand, are at a 4 year low, and could pop to a seven year low any week now…we lost a lot of supply during the Ida refinery shutdowns, and refinery utilization has never returned to prepandemic norms…just this week, gasoline production rose to above the same week of two years ago for the first time in my recent memory…
moreover, there is only a very tenuous relationship between oil prices and gasoline prices; oil companies have control of neither, they’re set in New York…daily trading in front month oil contracts alone is more than 100 times greater than average the amount of physical oil moving thru the system on any given day, and that doesn’t even count other derivatives addressing the same product….gasoline contracts have similar derivatives to physical ratios….the oil companies get what price NYMEX dictates for their oil, and they sell their gasoline for the price that NYMEX sets…an exception may be BP, who trades twice as much oil electronically as they produce physically….
did anyone wonder why the big oil companies rallied when the SPR release was announced, on an otherwise down day for the market? it amounts to an interest free loan of oil to those companies; they don’t have to work for it, or invest any capital…what they make off it goes straight to their bottom line…presumably they’ll pay it back when oil prices are lower (as now indicated by futures contracts out as far as one can see) and less profitable commercially…
that SPR announcement enriched Trump underwriter Harold Hamm (Continental Resources) by around $1.3 billion..
NB: graph of US oil prices vs SPR releases since 1990:
from a zero hedge post titled “Saudis, Russians Consider Pausing Oil Production Increases In Retaliation To Biden SPR Release” that i can’t vouch for…but the graph appears to be instructive…
oil was down $10.24 a barrel today, more than 13%, along with everything else, because of the new Covid variant…obviously, Biden will take credit, but now a new dilemma arises; does he release the SPR oil anyway, even though the reason for doing so is already fait accompli? if he does, and oil falls to a price where domestic drilling stops, what’s the next move?