Broader Economic Concerns Behind Oil Reserve Release

The AOL Energy article begins with the sentence…”Could it be all about jobs?” I would answer yes, and it is also about reelecting Democrats in 2012. Please don’t misunderstand, I agree with President Obama and the other 27 International Energy Agency member nations, who agreed on Thursday to release 30 million barrels of oil from US Straegic Petroleum Reserve and 30 million barrels from the other 27 nations.

"All the evidence is that the Administration spoke to all the producers that count," said Lucian Pugliaresi, president of the Energy Policy Research Foundation in Washington DC. "As far as I understand, the Saudis were on board with it. There was no substantial opposition."

"The consuming countries for the first time have really sent a shot over the bows of the OPEC producers, saying 'Now we are going to do things differently,'" said Learsy, the author of a new book on the oil business. "This is a very significant development in terms of the relationship between producers and consumers."

Significant indeed. The news of the release drove European benchmark Brent crude futures down as much as $8 per barrel. U.S. benchmark West Texas Intermediate dropped around $3.75 a barrel to $91.65 by early afternoon Thursday, compared with a recent high of $114 in early May.

The size of the U.S. reserve at around 750 million barrels, plus higher amounts held by the IEA and in commercial stockpiles. This move can be repeated any time consumer nations deem it necessary to protect their economies.

I believe this release of oil, and the subsequent immediate drop in crude futures confirms what I, and others, have written many times on Watchblog. Increase the oil supply and prices will drop. There are many ways to increase the oil supply in addition to releasing reserves. "Drill Baby Drill" comes to mind.

It would appear that our president has finally discovered the reality of markets and the underlying principle of supply and demand. His political career is mostly dependent upon getting our nation back to meaningful and productive work. I am quite certain this action by President Obama will infuriate many liberals, who...on Watchblog, have argued for higher fossil fuel costs to fund their dreams.

Well, my liberal friends, your dear leader has just thrown you overboard in favor of political reality. What's next, the president lifting bans on drilling and easing regulations that are hampering our own fossil fuel production?

In politics, anything is possible.

Posted by Royal Flush at June 24, 2011 3:54 PM
Comments
Comment #324939

i think there’s a certain amount of momentum that could cause prices to keep falling even after dumping that oil on the market has run its course and supply starts to level off. once that happens i think we’ll see the price start to increase again. while everyone likes seeing the price come down, with out some serious changes in our energy and monetary policy this opening up of the strategic reserves will only provide some short lived temporary relief.

i think in the long run this politically motivated move by obama will come back to bite him in the arse when prices begin to climb again. getting serious about increasing domestic production would have the same effect, and in the long run keep prices down.


gee…i wonder if the folks on the left are feeling sorry for the evil speculators that got stuck sitting on futures contracts that are dropping in value, because the market volatility is making hard to get out of them. maybe we need to start a gov’t fund to help pay those nasty margin calls.

Posted by: dbs at June 24, 2011 4:53 PM
Comment #324941

dbs writes; “gee…i wonder if the folks on the left are feeling sorry for the evil speculators that got stuck sitting on futures contracts that are dropping in value, because the market volatility is making hard to get out of them.”

Good point dbs. It is incorrect to believe that commodities speculators always make money. I am sure some got stung really hard trying to unwind their call positions. Some years ago I traded commodities on my own for about one year and had to stop as I couldn’t stand the stress involved due to the risk.

Posted by: Royal Flush at June 24, 2011 5:06 PM
Comment #324943

RF

i paper traded back in the 90s for awhile just to see how i would do. since i didn’t have the money to do contracts, and wouldn’t for the forseable future i traded what i considered realistic for me…options. it’s not as easy as it seems. although i did alright most of time, i knew a few bad days could all but wipe me out. i never did grow a big enough set to actually put money on the line. i don’t think most people have a clue how risky the futures market is, and the forces involved.

Posted by: dbs at June 24, 2011 5:15 PM
Comment #324944

You’re right dbs…trading in the commodities market is not for the faint of heart. I had a satellite connection to the markets with a ten minute delay. Sitting in front of that screen many hours every day, with my money on the line, hoping for a particular commodity to rise or fall was horrible. I read everything I could get my hands on but finally realized, I couldn’t get information fast enough or accurate enough to compete with those who did. I only lost about $10,000 over the year and it was a great learning experience in the relationship of risk to reward.

There are few, if any, legal activities that can match commodity trading for risk.

Posted by: Royal Flush at June 24, 2011 5:50 PM
Comment #324945

It is true that a small amount of oil released from reserves can lower the price, it becomes harder to argue that a larger amount of energy that could be successfully recovered by American workers would not lower the prices by an even greater amount. I know this is clear to us, but some liberals have argued that exploring for oil in the U.S. is a waste of time.

I break with many conservatives in that I believe in a revenue neutral carbon tax. I believe that gas prices do indeed need to be higher, but I want that money to stay in America as much as possible. I have two targets. The first is to cut down the general consumption of fossil fuel. The second is to take some of the power out of the hands of the despots and weirdos who control most of the world’s exportable oil.

I understand that challenge of the revenue neutral part. IMO tax proceeds from the carbon tax should be directly connected to cuts in the payroll tax, which would give a break to every American who works legally. It would also be a way to protect the pensions of those workers already retired. Non workers or those who do not pay payroll taxes will just have to pay the higher gas prices.

Posted by: C&J at June 24, 2011 5:55 PM
Comment #324946

Here’s a novel idea: reduce demand!!!!!! Which is really what is happening with tapping the reserve; demand for foreign oil drops. Now take a (serious) campaign to subsidize green energy, NOT the big oil companies. What happens? Demand lessens. Then what? prices drop…..all we have to do is lessen demand a few percent. Final question: why in hell are we not doing this??


A good, thought-provoking post. Thanks!!

Posted by: steve miller at June 24, 2011 5:58 PM
Comment #324947

RF

i did the ken roberts course, and got myself an IBD subscription. i actually enjoyed it, but the risk was not something i could live with.

“There are few, if any, legal activities that can match commodity trading for risk.”

or reward for that matter. funny though how when the price of oil is shy high the left curses the evil speculators, but when the price is falling like rock they don’t praise the evil speculators for doing the right thing……losing money,…. and lots of it.

Posted by: dbs at June 24, 2011 6:04 PM
Comment #324948

Steve

If you tax carbon, you are giving a defacto subsidy to alternatives w/o the danger of government money being used to corrupt markets and favor politically favored groups.

We already spend piles of money to subsidize green tech and have done for many years. By definition, if you have to subsidize something directly it is not economically viable.

Posted by: C&J at June 24, 2011 6:11 PM
Comment #324949

steve miller

“Now take a (serious) campaign to subsidize green energy”

green energy should not be subsidized. it should come along on its own when it is ready. when it can realisticly compete with fossil fuels, and be more cost effective to implement at the same time. it will then and only then be truely an alternative. if there is a profit to be made, someone will bring it along.

artificially raising the price of hydrocarbons through enviornmental regulations in order to force it to happen will not work.

Posted by: dbs at June 24, 2011 6:19 PM
Comment #324951

Long term steve, I believe that is what we all want, a reduction in the dependence upon fossil fuel. And, we need jobs today and the price of energy plays a huge role in retaining and creating jobs. Currently, our economy depends upon the availability of abundant energy at reasonable costs. I will give the president credit for recognizing this fact.

Unless, and until our economy recovers, there simply is not the money to promote alternate energy or nearly anything else we may want or need.

Congress is in no mood to increase our deficit spending. The top level meetings of Reps with Biden and the Dems is stalled with two leading Reps walking out. There will be no tax increases as the Dems demand and no more stimulous spending. The president recognizes this I believe, and he is facing reelection. Taking the action he has to lower energy prices cost the nation nothing but a reduction in our reserves.

I didn’t do the research to know for certain, but I suspect the oil in our reserve cost us less than what we sold it for.

Posted by: Royal Flush at June 24, 2011 6:25 PM
Comment #324953
If you tax carbon, you are giving a defacto subsidy to alternatives
.

This is incorrect. Fossil fuels currently receive several substantial subsidies. A properly managed carbon tax or purely auction based cap/trade program would eliminate this subsidy by internalizing CO2’s external costs. For the most part, alternative energy sources have very little in terms of externalized costs (except fission power). Letting those energy sources exploit their cost advantage should not be considered a subsidy.

I believe in a revenue neutral carbon tax
Why not use the revenues to pay down our National Debt? Our dependence on fossil fuels is partly to blame for our massive debt, shouldn’t fossil fuels help pay to alleviate that debt? Posted by: Warped Reality at June 24, 2011 6:44 PM
Comment #324956


Royal, on the whole you may be right, but Bush was buying oil for the strategic reserve when oil was pushing $140 plus per barrel and gas was over $4 per gallon. If that is the oil the was just released then the taxpayers probably took a loss, which should come as no great surprise.

The part I don’t understand is that oil producers have been saying that they have been producing enough to meet demand and it is speculators that are driving the costs up, but the reason being given for releasing the reserves is because demand is not being meet.

We have made a dent in our use of fossil fuels. The question is should we spend our money increasing our ability to lower our dependence on fossil fuels or do we spending it on finding and using new sources of fossil fuels?

IMO, we should allow our children and grand children the power to make these decisions now. The same for our remedies for global warming. We older Americans are not the ones that have to live with the consequences of our decisions. Those decisions will be based primarily on the current needs of we baby boomers and may not be in the best interests of future generations. I know, no way Hosea. Unlike us older people, our children don’t have the knowledge and experience to make good decisions.

For the government to own a oil reserve is socialism and this act was an attack on the free market.

Dbs, when prices go back up, can’t Obama release more of the reserve, say in October of 2012?

It probably won’t be necessary for Obama to perform such an obvious political act because, if 2012 is a typical presidential election year, the price of oil will drop before the election.

Posted by: jlw at June 24, 2011 7:20 PM
Comment #324957

“For the government to own a oil reserve is socialism and this act was an attack on the free market.”

I don’t think so. The government purchases many things from the private sector, oil is one of them.

“Dbs, when prices go back up, can’t Obama release more of the reserve, say in October of 2012?”

Yes, of course. As the article stated, we and the other 27 countries can release oil from reserves anytime we wish to strengthen and protect our economies. As one writer in the link said, it puts the consumer in control.

I believe another added benefit of potential release of reserves is that it places more risk on the speculative oil commodity traders. With this unannounced action of oil reserve releases, and knowing it can happen again, without notice, it is one more factor that must be considered by speculators. As a former trader, I believe it will dampen enthusiasm for speculative trading and can help prevent major oil price changes.

Posted by: Royal Flush at June 24, 2011 7:41 PM
Comment #324960

“The part I don’t understand is that oil producers have been saying that they have been producing enough to meet demand and it is speculators that are driving the costs up, but the reason being given for releasing the reserves is because demand is not being meet.”

Good question. From what I can gather, the release of oil from the reserves is designed to actually get produced oil to the consumer market place. Not to simply increase the amount of crude available. It is my understanding that much of the oil purchased by speculators is being held off the market as prices rise. Tankers and storage facilities are full but the oil is not being refined into marketable products. It is just being re-sold in place and contracts rolled over. This move by Obama is designed to break the back of speculators by actually moving oil to the consumer marketplace.

I believe that this occurring in many of the commodity markets. Warehouses are full but the product is not finding its way into the consumer market. This makes sense as an enormous amount of speculative money floods into futures markets bidding up future prices of the commodity.


Posted by: Rich at June 24, 2011 8:28 PM
Comment #324962

Warped

Forget the auction. Just tax the carbon. No exceptions.

Re revenue neutral - It would be good to reduce the deficit, but if carbon taxes became just another way to maintain the bloated monster that has grown up in recent years, it would be a bad thing.

We need to cut back to the size of government (adjusted of course) that we had in 1999. I am not interested in feeding the monster with more taxes.

Posted by: C&J at June 24, 2011 8:49 PM
Comment #324964
Forget the auction. Just tax the carbon. No exceptions.

Obviously a tax would be better because it’s more transparent and less likely to be manipulated by politicians, but I’m not opposed to auctioning permits if the auction is run well.

if carbon taxes became just another way to maintain the bloated monster that has grown up in recent years, it would be a bad thing.

In case you haven’t noticed, government spending has not been correlated with tax revenue. You are falling for Grover Norqist’s mistake and mixing two issues that are not that closely related. A revenue neutral carbon tax and one that raises revenue have the exact same impact on government spending debates, which is next to none.

Posted by: Warped Reality at June 24, 2011 10:03 PM
Comment #324966

Warped

I recall in 1999-2000 when the budget was balanced and politicians started to get a lot more “flexible” with spending. Politicians will spend all their money and then more.

IMO - The Democrats and Obama figured that they had won a great victory in 2008. They thought they could raise spending and then get tax revenues to support a permanent increase in the size of government.

Posted by: C&J at June 24, 2011 10:20 PM
Comment #324969

Well, when you swim with sharks, folks, don’t be surprised when you find yourself back on the beach missing a few limbs.

Those markets are for the big boys, who can afford their mistakes.

There’s good in encouraging investment, but speculation for its own sake will always swing prices away from equilibrium, rather than towards it.

Posted by: Stephen Daugherty at June 24, 2011 10:34 PM
Comment #324975

Perhaps someone could explain to me why the Democrats have been saying for decades that the production of more oil will not help the price of gas, and that there is a glut of oil already on the market but the speculators are driving the cost up, and yet Obama has released the oil reserves for the purpose of flooding the market with oil and bringing down the cost?

I fear he is puting our country in a dangerous position, simply for political gain and I believe the American voter will be wise to it. He has also managed to piss off one of our only Arab allies in the area, the Saudi’s.

Posted by: Mike at June 24, 2011 11:18 PM
Comment #324981

Mike,

The oil that has been extracted isn’t fully getting to the market. Its being stored in tankers and other storage facilities by middle men and held off the consumer market as speculative investment drives up futures. Tankers worldwide are full. The Obama release is designed to break the speculative cycle, leaving the the speculators holding the bag and driving the spot oil prices down.

Posted by: Rich at June 25, 2011 8:27 AM
Comment #324983

Rich

It can cost upwards of $250,000 a day to maintain a tanker on the ocean. How long could speculators continue shoulder those costs on the chance that oil will rise in price?

Beyond that, eventually oil MUST come to market. Once it is out of the ground, it can be delayed for a matter of days, but not much more. The infrastructure requires product moving through the system. The only real point of leverage is in the initial supply.

Posted by: C&J at June 25, 2011 10:42 AM
Comment #325027


I tend to agree with C&J. With a product like oil, the supply side is in the drivers seat. Consumers can decrease the demand, but not by a large margin. We are busy people with many things to do and a need for energy to do them.

C&J, have you heard anything about natural gas executives blowing whistles about natural gas being the next big boom and bust.

Posted by: jlw at June 26, 2011 7:20 PM
Comment #325029


Aren’t companies that drill for oil and gas in the U.S. going to expect to get the highest return possible for their investment? How does that relate to the premise that drilling in America will greatly reduce prices? I can see the possibility of us paying even more for gas. The sales pitch, it’s better than costly military interventions on behalf of foreign oil.

Posted by: jlw at June 26, 2011 7:45 PM
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