The US could refill the strategic petroleum reserve many times over and keep a giant stockpile of crude around. What’s the most the government could buy up on the cheap?
If the government later resold it at a profit, would it be enough to cover the recent bailouts, the entire national debt, pay for universal health care, alternative energy, the Iraq war, and also solve the Social Security insolvency crisis?
Maybe I’m wrong here, but wouldn’t the government have to buy it at market price just like everyone else?
Yes, but presumably it can be sold later at a higher price. For profit.
I think the OP is implying that prices will go up again, once the world economy recovers, so the the US government should buy up oil now, betting on this fact.
Though how much they could actually store without investing tons of money in huge new storage facilities, is another question. Additionally the act of buying up huge amounts of oil would itself influence oil prices.
You know those massive underground holes that used to contain crude oil before it was all pumped out? Could they be used to store, say, large amounts of crude oil?
So, you’d be pumping the oil out of holes in the ground from other nations and redepositing it somewhere where it can be easily guarded and controlled. Seems like the fixed cost of storage is rather low.
And yes, I’m presuming the price of oil will rise in the future. Maybe even from the act of buying it.
Oil doesn’t exist in massive underground holes. It permeates porous rock IIRC, so you can’t just pump oil into old oil fields. However, we do have massive salt domes where we can create big holes to store the strategic oil reserve now.
The reason oil prices are currently relatively low is because the amount of oil people are buying is relatively low. If the United States government started buying a significant amount of oil, the price would go up. The government would not be real popular when people learned that their tax dollars were being spent on a program that was raising their fuel prices.
The United States uses about 20,000,000 barrels of oil a day. If we bought it at its current price of around $60 a barrel and then sold it if it went back up to around $110 a barrel, we’d make around a billion dollars a day in profit. (I’m ignoring all of the economic factors that would complicate this plan, including those I mentioned above.) That sounds good, but the national debt alone costs us four billion dollars a day. So we wouldn’t even be bringing the budget into the black.
As I see it, generating a billion dollars every day and slowly securing a source of crude oil within our borders is all upside. As for popular support, I think many Americans would rather pay the same price for gas as paid earlier this year than see more Americans die fighting in wars over oil and pay for the war through taxes anyway.
What’s the real downside?
For one thing, when oil’s selling at $110 a barrel, the government can’t still be buying it at $60 a barrel. At that point, the government is going to start having to decide whether or not to keep buying, betting that the price will keep rising, or draw down its reserves, betting that the price will fall. I don’t know much about such things, but this basically sounds like the commodities futures market. And I’m really not ready for the government to start betting billions on petroleum futures.
That oil doesn’t go back up as you are projecting? That there is some kind of breakthrough technology that allows us to transition to some alternative? That some percentage of the oil the government attempts to store becomes either corrupt or more expensive to process? That another large source of crude is found or exploited (like the Canadian tar sands) which creates a glut on the market? The the US dollar continues to strengthen and foreign currency and economies who compete with us for oil continue to fare poorly? That China and India especially implode, at least wrt increased oil usage? Oh…probably a ton more things but those are the ones that spring to mind right off the bat.
The thing is, if you think oil is going to go back up to where it was you should be buying tons of oil futures. Right now it’s hard to gage just what the oil market is going to do…which is why people are cautious about oil right now. Sure, it COULD go up again…and in reality it probably will…but when exactly? A year? 5? 10? That’s a long time for even the US to put out the kinds of extra cash you are talking about (after all we ALREADY are buying oil for the strategic reserve) for those kinds of time periods purely as an investment. A lot can happen in 5 or 10 years.
-XT
Yes, but a government is capable of making a large, long-term play like this. And the US doesn’t seem to have a shortage of readily available cash… witness the 700 Billion that immediately materialized for bailouts.
If the goal is to secure an important resource to give us time to transition to alternative energy, it seems like a bargain compared to other ways of accomplishing that goal.
You do know we borrowed that money, right? And I’d say the borrowing well is probably getting close to the bottom right now…or at least that this would be considered a low priority in which to borrow more.
-XT
If borrowing is virtuous because it will be repaid, consider that the crude oil monies will also be repaid (and profit is earned on top).
The current capacity of the Strategic Petroleum Reserve (SPR) is 727 million barrels. The current inventory is 701.8 million barrels. Only 61.1 million barrels have ever been withdrawn from the SPR since it first start accepting oil back in 1977 (there is a four year gap when oil wasn’t added to the SPR).
We have a 58 day supply right now at current rates of consumption. If you add in known private storage, our supply goes up to 118 days.
Considering it’s taken 30 years to almost fill the SPR, how fast do you expect the government to create additional stockpiles and fill them to capacity? At an average price paid per barrel at $28.42, SPR value is less than $20 billion. Hardly enough to pay for a gas-guzzling Detroit Three bailout.
Consider the folks selling that oil right now at those cheap prices: If they thought that the price was going to go up so high again in the future, they wouldn’t be selling it on the first place, they’d be holding onto it for their own profit. And, of course, these are folks working in the oil industry, not just random armchair politicians. What makes you think you know something they don’t know?
How about, you don’t have any money. You are broke, neck deep in debt and have mortgaged your children’s financial future away for shiny objects and electronic gadgets made in Japan. You just clocked in a deficit larger than the combined GNP of a number of midsized countries, and you want to take out an additional gigantic loan to speculate in futures on the commodity market? Don’t you think you better start at least thinking about how you are going to pay of your existing debt first?
If you are so sure that prices will go up in an orderly, predictable way, you could act on it yourself. Borrow money, buy some land, bury a storage tank, fill it with oil (or gasoline, or diesel). Now you are insulated from future price shocks and have a nice safe supply of fuel for your vehicles. Plus you can make a profit selling it on the open market, hopefully enough to cover the interest on your loan.
Do you see the risks inherent in this plan? Now imagine doing it on such a scale that your purchases actually drive up the price of the fuel as you buy it. How do you measure the risk that a legislative body that could decide to change the plan at any time? Furthermore, imagine doing it with other people’s money. People who are already not optimistic about their short term finances. And they can fire you in 2 years.
What if the government had started speculating on tech stocks in 1999 or residential real estate in 2004. ‘Everybody’ knew they were going to go up in value. We’d all be pretty irritated right now.
Storing oil in porous rock is fraught with difficulties, I leave it an engineer to say if it’s ever been done economically. Natural gas, on the other hand, is routinely stored in formations.
You do realize that the billion dollar a day figure was a theoretical best-case scenario? It would never work in reality. As I wrote in the part of my post you apparently skipped, if the United States started buying up a lot of oil then oil would stop being cheap. Oil prices would go back up to $100 a barrel and why stockpile it at that price? And when the United States started selling this oil, the extra supply on the market would drive the price down and they would be selling it for lower prices then they bought it for. All of this would be paid for by borrowing money that we’d have to pay back with interest from our taxes. The country would end up substantially poorer and things like public health care and social security would have to be cut or eliminated.
I think this is like saying a merely good solution won’t solve all the problems, so let’s not do it and wait for a better solution that can. I don’t dispute that if the US government buys up a lot of crude at today’s price, the price goes higher.
Since the government’s wallet is pretty deep, it can sustain a stable price point that clearly the world has been willing to pay for months on end. And if someone smart like Warren Buffet, working in conjunction with Obama were at the helm, they can do it in a non-retarded manner that wouldn’t jack up the price one day and hammer it the next.
Then, the next time Venezuela or Saudi Arabia decides to fuck with the price by limiting production, the US can sell off some of the crude to keep prices stable. And there would be no need to go to war over a stable supply of oil, if the US actually has their hand on the spigot.
If there is a finite amount of easily pumped light sweet crude, would a larger strategic stockpile make sense economically as we transition to more fuel efficient automobiles and alternative energies? One of the problems with developing these technologies is that companies cannot rely on the fact that oil prices will be high. Why make better cars or solar panels if gas might be cheap in a few months? Well, the US can ensure that doesn’t happen, thereby promoting a nice, safe, incubating environment to develop future technology.
No, but a good solution must at least solve more problems than it creates and your idea hasn’t met that standard.