The American Petroleum Institute issued a statement last week that included:
The U.S. consumes ~19 MMBO per day and produces ~6 MMBO per day. The world consumes ~75 MMBO per day. Prior to this release, the SPR held ~570 MMBO. OPEC and the Saudis have announced 3 daily production increases this year, and the Energy Information Administration (great source) states in their September Outlook that only Saudi Arabia, Kuwait and possibly the UAE have any ability to increase production (industry scuttlebutt says it’s only the Saudis); i.e., the rest of OPEC and the other producing countries are currently maxed out. Iraq is producing ~2.8 MMBO per day and is predicted to bring that up by ~0.5 MMBO per day over the next year. And Russia and France have recently begun pressing for easing of sanctions against Iraq. While I seem to recall a figure of 5 MMBO per day potential production from Iraq, their facilities have not been well maintained since the Gulf War and will take time to be rebuilt. And the EIA predicts world demand will grow by 2 MMBO per day next year.
So…
At this point in time nobody really knows the answer to my question. Let’s ignore for the moment the possible influences of the current presidential campaign on this decision and address the question of how this release of SPR oil will really likely affect energy prices and availability. What do you think?
My own gut feeling is that it will likely produce a short term psychological effect in the market that will bring prices down a little, perhaps to the high $20s. And I do mean short term; i.e., not lasting through the end of the year, by which time I think we’ll be back up in the $30’s. The amount of crude involved is not enough to fundamentally affect the total supply picture. It will tell the rest of the world that the U.S. government is willing to try and drive the market price down, although I think the powers that be likely consider the entire content of the SPR to be too little to produce a lasting effect.
OPEC has said many times that their target price is $25 per barrel (click here to track oil & gas prices) and it is hard to say how they’ll react. If they’re really close to maxed out, do you think they’ll go ahead and toss in their last few MMBO per day? If they do, they have no more ability to drive prices down, and they do have an interest in not breaking their customers’ economies.
I have to wonder as well how the refiners are likely to react in light of: a.) they’re reported to be running at near full (94.7% on Thursday) capacity already and b.) the release program is setup on a swap basis so they get xxxxxx barrels from the government today and repay in kind later - you have to have some confidence that the price is going to stabilize or drop to do that kind of deal (well, I guess you could live with some increase if you consider the time cost of money, but you’re dealing with a volatile commodity).
I agree with you wholeheartedly. The only reason Clinton did this is to give Gore an advantage with the weak-minded voter that the Democrats are willing to do whatever it takes to ease the burden on Joe six-pack. The precedent he has set is very unwise and can only lead to more long-term consequences. Low gas prices are not a “right” of the average American and artificially increasing the supply in the short-term helps no one and solves no problems. I hope that we don’t need those strategic reserves for a real emergency any time soon.
I’m trying to figure out what the difference is here. Supply disruptions are going to cause high prices. Price increases can be caused by increased demand or by decreased supply, or a combination of both.
Is the American Petroleum Institute saying that current price increases are caused by a sudden increase in demand? If so, I wish they would say it more directly. If not, I don’t really know what they’re saying.
A question for those who disagree with the administration’s decision: has there even been a release from the Strategic Petroleum Reserve that you would agree with? Honestly, I can’t remember it ever being used before; I can remember times when people have suggested that extra quantity be released, but I’m unaware of any time they have prevailed. But there may have been plenty of occasions I’ve missed.
It was tapped once before, during the Gulf War. What API appears to be saying is that the SPR is meant to be a source of supply when supply is disupted as in war; i.e., that there isn’t enough of it to be trying to drive the market price, and if you use it for that then it’s not there when a real disruption occurs, as opposed to a price rise as a result of a longer-term decline in supply v. demand such as we are seeing now.
Well, that makes sense, I suppose, but I still don’t see how the supply of oil to the United States was disrupted by the Gulf War. If 3-4% of our oil came from the Middle East (and I don’t have a cite to back that up, so correct me if it’s wrong), and some fraction of that came from Iraq and Kuwait, is that really enough to count as a disruption?
That’s not supposed to be a loaded question; I really don’t know. I’m not saying Iraq and Kuwait were not a major source of fuel for the world in general, it just doesn’t seem like they were that important to the U.S. relying as we did (and still do?) Mexico, Venezuela, and Nigeria for a lot (most?) of our foreign oil. Did the latter three countries quit selling as much oil to us after the invasion of Kuwait or something?
It looks like I was heavily misinformed, at least according to http://www.us-israel.org/jsource/US-Israel/oil.html . The latter link indicates that Saudi Arabia supplied around 20% of U.S. oil imports during the early 1990s. For some reason I heard the “4%” figure thrown around a lot as how much oil the U.S. got from the Middle East - I suspect that somebody got “four percent” mixed up with “one fourth”.
I’m still not sure how much that dropped during Iraq’s occupation of Kuwait, although obviously the whole region was affected. (The table only goes back as far as 1991 so I don’t know how important Iraq and Kuwait were beforehand.)
What a huge boondoggle this is to Big Oil – i.e. the Gas companies. They get to buy this oil cheaper.
Has it occured to anyone that the shortage is not OPEC’s fault, but a lack of refineries? All of our refineries are already operating at capacity – that is what is causing the shortage of home heating oil – they are having a hard enough time making enough gas.
Since the problem is not a shortage of oil but a problem of shortage of refineries, “Big Oil” get’s cheaper Oil, and still gets to charge just a much for goas and heating oil on the consumer end.
But don’t worry – Clinton will release $400 million dollar which the poor can give to Big Oil in exchange for not being allowed to freeze to death because Big Oil hasn’t built enough refineries. Big Oil is thus being rewarded for not building enough refineries.
Although I’m sure they will give a good chunk of that money to a worthy charity, like, oh, I don’t know, maybe to Al Gore’s campaign coffers?
Meanwhile, one of the cities that does have a number of refineries, and they have to be somewhere, is Houston. Houston is in Texas, and because of the refineries, Houston is polluted. Obviously all George Bush’s fault. Nothing to do with soccer moms with SUVs.
Oh, and of course, George is the “friend to big oil” not Al Gore.
Boris – you are somewhat right. Blaming OPEC is a red herring so Exxon, Mobile, Shell, etc. can get a big handout without anyone realizing it at our expense.
This links say Bush gets 15 times as much money from oil companies as Gore: http://cbsnews.cbs.com/now/story/0,1597,209159-412,00.shtml
How much do you expect this to change due to the Administration’s decision to release more from the reserve?
That link will work if you copy-and-paste the whole thing (out to the .shtml) into your address box. The message board doesn’t seem to be construing it right, getting confused by the comma. So don’t just click; copy and paste.
On the whole, I don’t think it’s going to matter too much. Only a sustained period of high fuel prices is going to get people to switch back to smaller cars. The Administration’s decision will depress prices temporarily, but it won’t make a big difference in how long the high prices last.
If the prices stay high for a long time, and I have a hunch that they will, then people are going to start wondering what they bought their pickups and SUVs for, and start buying smaller vehicles again. Demand will drop, prices will level off or fall, and we can jump back into the cycle all over again.
My main hope is that the next time public amnesia sends us through the cycle again, we will have more options for fueling automobiles. Perhaps propone, liquefied natural gas, alcohol, or some combination thereof, will allow us a diverse enough set of sources that no single cartel will be able to dominate pricing. Look at it this way: military vehicles can already use a variety of fuels for the same engine. Perhaps one day it will be cost-effective to design civilian vehicles the same way. Sure, it’s a departure from today’s technology, but it’s a mere baby-step compared to the changes that were commonly predicted in the 1970s: the very death of the internal combustion engine, to be replaced by electricity, public transportation, skateboards, and/or the end of civilization itself.
Are there any good sources contrasting the various petroleum suppliers by fraction? I mean, our dependence on foreign “oil” has been noted, and sometimes propane and natural gas are cited as alternatives. Given that propane and natural gas are petroleum fractions, I guess that raises the question: how much less dependent are we on foreign sources of the lighter petroleum fractions (ethane, propane, etc.), vis a vis the heavier fractions (heptanes, isooctanes, diesel, etc.)?
Another way to put this question is, are propane and natural gas good strategic alternatives to gasoline because we have more propane and NG, or just because we can withstand the inevitable increases in NG and propane prices that would come with automobile conversions? After all, propane prices are hardly as key to the U.S. economy as gasoline and diesel prices; NG is probably somewhere in between. (I emphasize “strategic” to set strategic issues apart from environmental issues - propane and NG have different emissions data than gasoline, but that’s not what I’m talking about.)
Are U.S. petroleum sources richer in NG and propane than foreign petroleum sources?
Non-petroleum sources of NG have been suggested. Are these hypothetical, or are non- “oil field” sources currently in use? Do similar sources existed for propane?
[response to hijack]
I looked at the site you posted and was actually surprised to see how trivial the amounts of money involved are.
Totals
George W. Bush: $1,543,186
Al Gore: $99,660
Top Five Oil and Gas Contributors
To Bush:
Enron Corp.: $92,250
El Paso Energy: $39,834
Koch Industries: $32,200
Exxon Mobil Corp.: $30,575
BP Amoco Corp.: $27,620
To Gore:
Enron Corp.: $9,750
Occidental Petroleum: $8,000
Belco Oil and Gas: $6,000
Amerada Hess Corp.: $4,000
Kansas Pipeline: $4,000
In response to your question, no, I douubt it will change. Why would it? Gore has a long tradition of being hostile to the energy industry and, despite recent campaign trail statements (I heard him on Thursday say, “We will end our dependance on foreign oil. We will develop our own resources!” Not a very Gore-like pronouncement). A funny thing is that those in the industry tend to vote against Democrats, but the highest prices for oil & gas have come under Democratic Presidents, at least since the first embargo.
[/response to hijack]
Boris, try the Energy Information Administration site. It’s big and there’s lots of info. They treat Natural Gas and Petroleum separately. In 1999 we imported 16% of the NG we used, most of it from Canada (if more people switch to it in the NE, heating oil concerns will lessen).
To answer your question, beatle, I’m a good 95% in agreement with you.
The other 5% is my slim hope that if the gummit is good enough about flooding those 30MM BBLs over the next month, they may reverse the backwardation going on that is its own distortion of prices.
Hell, if gummit really wanted to restore equalibrium to the market, they’d sell that oil without announcing it, buy some March futures to replace it, and spend the profits flattening the curve, generating more revenue in the process. It wouldn’t “lower prices,” but restoring normal market conditions and the incentive to build some inventories might lead to a cascade effect that, combined with demand-side adjustments, might bring prices down in the longer run.
I’d do it myself, but I’m a few billion short this week. Maybe we can interest Soros?
First, I was delighted to read (largely) rational comments about the current oil broohaha. Reading some other threads, I was beginning to wonder if there was any possibility (bomb the oil producers to bring the price down. Ah, now that’s a brilliant solution.).
A small quote from the New York Times 25/9/00
From: Rich Nations and Some Oil Producers Call for Price Cuts
“Finance ministers who are gathered here for the annual meetings of the monetary fund and the World Bank hope that their sustained oratorical campaign against a $30-plus barrel price for oil will have a marked impact on a volatile commodity market that is sometimes moved by psychology and speculation.”
It would appear that the oil release could be construed as part of an intervention ressembling the EURO intervention this week in the currency markets (oops last week now) to help break a (presumably) exaggerated atmosphere of speculation. Justified? Maybe, maybe not. Will it work? Let’s see.
(In the political sphere, I’ll hazard the opinion that Clinto is damned if he does, damned if he doesn’t so…)
Not much to go on, yet, but after the first half-day of trading since the announcement, NYMEX light sweet was $31.75/bbl at noon (NY time). It had closed at $32.68 on Friday, down from $34.00 on Thursday. That’s where it was toward the end of August. None of that is significant, yet. It’ll be a bit before any government oil in some appreciable amount is actually out there. OPEC meets in Caracas Wednesday. We’ll be watching.
Excellent question Tracer. And one for which a straight answer is tough.
When crude is refined into end-products, the exact quantities of any type (or combination of type) of fuels depends upon the chemical makeup of the crude. One grade may most effectively yield gasoline, another heating oil.
The strategic oil reserve was intended to be tapped only in time of national emergency. As such, the grade/type of crude stored in the reserve is best suited for refining into … (drum roll, please) jet fuel.
Good! 'Cause jet fuel is mostly kerosene, and I saw some kerosene-powered space heaters on sale at Costco a little while ago.
But really, I’m not looking for exact quantities – only ballpark figures. When refined, does the usual grade of light sweet crude traded on the futures exchanges yield about 5 gallons of gasoline per barrel, or about 10 gallons of gasoline per barrel, or about 20 gallons of gasoline per barrel?