After so many oil embargos and price shocks, energy crises and shortages, you’d think we’d know better at this point, that we’d do everything possible to prepare if there’s another one down the road. Unfortunately, we haven’t learned lessons from the painful experiences we’ve had in the past. In fact, it’s almost as if we’re tempting fate, daring it to bring on another crisis.
The US is doing this by drawing down its strategic petroleum reserves (SPR), and doing so in a big way and speedily.
America’s Strategic Petroleum Reserve is the world’s largest. At the end of the Trump Administration, it held some 650 million barrels – a very hefty number and of a magnitude that energy experts believe is sufficient to enable us to weather a crisis.
The SPR is literally the energy version of saving money for a rainy day. According to Investopedia, the government has tapped into these reserves following accidents, sudden economic and political shocks, and natural disasters; on occasion, it has also sold and/or loaned oil to other nations, a move that may have had altruistic motives but practical ones as well, since the global economy is so closely connected these days.
Apparently, America’s approach to the SPR has changed in recent months, as the Biden Administration has withdrawn huge quantities of oil from it for non-emergencies. The first withdrawal was for 50 million barrels, the second for 30 million and the most recent one for 180 million. In total this comes to a whopping 260 million barrels, or very nearly 40% of the total amount of oil reserves that we had been hoarding.
Some of these reserves went to help Europe cope with the severe energy crisis they’re experiencing. Additional reserves were used to increase the supply of oil in the US and thereby ease skyrocketing gasoline prices here. It’s estimated that one million barrels were sold to China, the archrival of the US that is buying every barrel of oil it can get hold of. On a related note, there is speculation that at least some of the oil sold to Europe may have changed hands in various deals and was subsequently sold to China.
Were the withdrawals and sales from the SPR justified? At least one informed source says “No,” as this oil was stockpiled for us if there is a future emergency – and not for short term political or economic benefits.
Rick Perry, a former Energy Secretary and Republican governor of Texas, expressed this opinion very bluntly in a recent interview. “We are on the verge of a major calamity here,” he told Fox News. “We’re down to the lowest amount of strategic reserves since 1986.”
What makes this even more worrisome is that refineries now have the lowest amount of crude since 2004, adding to concerns about what would happen to ordinary people as well as the economy in case there’s an economic emergency.
Second Thoughts – But Same Opinion
Even on second thought it’s difficult to understand how selling so much oil from the SPR will help the US in any meaningful way. On the other hand, the idea that it could be bad for the US is becoming more plausible because the number of countries experiencing shortages keeps growing.
Supporting the policies that eliminate fossil fuels sounds great on paper – after all, everyone benefits when fewer harmful emissions are released into the atmosphere. Presumably that’s why many political leaders and businesses in the US and Europe have jumped aboard.
But for the time being, the global economy is still dependent on fossil fuels – and there is clearly a shortage of them. The combination of less exploration and tougher environmental regulations have put many countries in a precarious situation. And the costs of heating, growing food, and keeping cars, trucks, and factories running have become unaffordable for many people.
Although the price of oil is down sharply from the recent high, some very informed opinions think it could make new highs going forward. Jeremy Trafigura, CEO of the global commodities trading firm that bears his name, warned that oil could reach $150 in the coming months. Obviously, an increase so large would take a huge toll on economies already weakened by supply shortages, a virus that doesn’t go away, and consequences from the war in Ukraine.
Meanwhile, a proposal to cap the price of oil imported from Russia could backfire – big time – according to a report by JP Morgan. The report says it could lead to a global recession and in a worst-case scenario drive oil prices to a mind-boggling $380/barrel.
Even aside from that, supplies of oil going forward are uncertain. For example, Libya has in effect stopped producing oil, taking more than one million barrels a day off the market. The EPA is enforcing ozone and other environmental regulations in the Permian Basin, one of the most important oil-producing areas of the country, which could affect production there.
These probably are among the factors that have convinced Warren Buffett that oil is the place to be these days, and he has invested many billion in energy companies like Occidental and Marathon in recent months.
If all this were not enough, on July 12, separate reports by the International Energy Agency (IAE) and OPEC both warned about tighter energy supplies going forward. The IAE said, “The world has never witnessed such a major energy crisis in terms of its depth and complexity.”
And a warning from OPEC said, “Oil, natural gas, coal and electricity prices – they’re all going (through) the roof. Why? Very simple. Russia, the country that invaded Ukraine, is the largest exporter of oil and gas.”
President Biden is urging OPEC to increase its output, but if press reports are accurate, there is little they can do, because most members are already producing at or near their capacities – and oil demand in 2023 is expected to exceed supply by one million barrels a day.
Oil and gas are not clean-burning fuels, and attempts to reduce their use to help the environment did not work out as hoped for. Unintentionally, those efforts have exacerbated shortages, played a role in rising energy prices, and set the stage for increased use of these materials. And it appears that nothing on the horizon can change this trend any time soon.