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highsea
08-20-2004, 11:09 AM
We add about 100,000 barrels a day into the Strategic Petroleum Reserve. The SPR is currently at a level of approx. 666 million barrels. The capacity is 700 million barrels.

Democrats called for Bush to stop filling the SPR when oil was at $38.00 per barrel. That figure is about $10.00 over OPEC's theoritical target price. Bush refused, saying he wouldn't tap the reserve unless there was a serious threat of an oil shortage.

At the time, I was against the idea of tapping or stopping the buildup of the reserve, but now with oil at nearly $50.00 per barrel for US light Crude, I think Bush should use the SPR.

This is not a "flip-flop" on my part. I didn't think it was appropriate when oil was at $38.00.

What is driving the high oil prices is not the market, it is market speculators. An announcement by Bush would have the same type of effect on oil prices that an announcement by the Fed of lower interest rates has on the stock market (but in reverse, obviously).

Tapping a small amount, say 5 million barrels from the SPR would have a strong psychological effect on the oil market. It would have no effect on actual supplies or demand, but it would burst the bubble, and oil prices would drop $10-$12 dollars overnight.

It worked for his dad in 1990, and it would work today.

-CM

Wally_in_Cincy
08-20-2004, 11:37 AM
<blockquote><font class="small">Quote highsea:</font><hr> We add about 100,000 barrels a day into the Strategic Petroleum Reserve....<hr /></blockquote>

If that is the case they could just quit pouring it in for a few weeks at least. I think it might be bad policy to tap it every time prices go up (see: Bill Clinton)

How much of this is being caused by Putin locking up the CEO of their major oil company on (what I have heard are) trumped-up charges? I have not really been able to keep up on that situation.

highsea
08-20-2004, 12:32 PM
Wally, just to stop pouring it in I don't think would have the desired effect, since we are only talking about 100,000 barrels a day. (The US imports 10 million barrels a day)

What really makes the point is a symbolic drawdown. Bush 41 announced a 4 million barrel "test" sale at the start of Gulf War 1, and the price dropped $10.00 overnight. He also got a statement from the Saudis that they would increase output if it became necessary. This had the effect of calming the market, and we did not see the crazy behavior we are seeing right now.

The idea is to send a message to the speculators that the US will use the SPR to dampen the fluctuations. This would burst the bubble put some stability back in the prices. Even if you had to do it twice, I'm only talking about 10 million barrels. That would have no significant effect on the SPR, and we wouldn't have to stop pumping it in. It would pay for itself because we would be adding $40.00 a barrel oil instead of $50.00 a barrel oil anyway.

The situation in Iraq is clearly the driving factor in the price fluctuations due to market speculators. Every time Mookie Sadr bombs a oil well, the price jumps $2.00. A pipeline stops for one day, and the price jumps. The pipeline starts back up, and the price drops. The standoff in Najaf caused the price to jump by $3.00.

It's crazy, Iraq is only capable of exporting 1.7 million barrels a day at best. On a bad day they still can export 900,000 or a million barrels. It shouldn't have this effect, but it does.

The Russians will not stop pumping oil because Putin puts a CEO in jail, the tax problem is only a 3.4 billion dollar thing. Enough to take down the company executives, but not enough to effect Russian output.

-CM

Steve - Detroit
10-04-2004, 03:57 PM
Highsea,
With oil once again bouncing around the half century mark I just had to give new life to this thread.

This thread really piqued my interest when you wrote it because it came from someone who has always taken such a conservative view on things and market manipulation by the government is hardly a conservative view. (for the record, I am very much against any tweeking of a freely traded commodity market by the government).

I’m curious, however, on how you interpret the last month of oil price movement and if you still feel this plan will have the result you envisioned back in August.

highsea
10-04-2004, 05:22 PM
In general I am not in favor of using the SPR for tweaking the market. On the other hand, the US, as the biggest oil producer and consumer in the world, has the ability and responsibility to maintain stability in a resource of such strategic importance.

What has been happening in the market lately is that the instability in the ME, Russia, and Africa has thrown the normal market controls out of whack. When you look at the causes of the fluctuations, it really is a wierd thing.

Rebels in Nigeria threaten to blow up a refinery, the price of oil jumps nearly a dollar a barrel. That's crazy when you consider that Nigeria is only producing about 2.6 MBPD. Then the rebels back down, and the price drops back again. In Iraq the terrorists blow up a pipeline, and the price jumps a dollar. The actual effect on oil supplies is exactly zero, because the storage tanks at the ports are full, and exports continue as before. Even the loss of the pipeline for 2 or 3 days only costs a couple million barrels. But the speculators send the price up anyway, because there is no stabilising factor.

The SPR sits at 670 Million barrels or so. Our imports are sourced mainly in Mexico and Canada, and both supplies are stable. Persian Gulf imports account for about 1/5 (1.8 MBPD) of US imports. That means we could cut Persian Gulf supplies and run off the SPR for 2 years, before we would notice. In that time we could easily develop other sources like Russia, or increase imports from Canada or Mexico to compensate. Tapping ANWR would replace that oil, but of course the environmentalists won't hear of that.

The US sources what oil we do from the ME primarily as a stabilising factor. It's really Europe and China that have the high dependence on that oil. Yet the situations in the ME and Africa have a huge effect on our economy, because ultimately every barrel of oil in the world competes with every other barrel.

When GW announced he would provide oil from the SPR to a couple of US refineries, he was pretty clear that the intent was only to keep the refineries running in case the storms in the gulf caused an interruption in their supply. So the effect was temporary, but even so the price dropped to around $41/barrel overnight. But everyone knew it was just until the hurricanes blew through, so there was no lasting effect.

Prior to the 91 war in the gulf, Bush senior announced the drawdown. This sent the signal to OPEC that the US was willing to use the SPR if oil prices got out of control. We didn't really draw much oil out, only 5 million barrels, but the message was clear, and OPEC was very vocal about preventing the war from interrupting output. This kept the price stable, because the speculators knew that OPEC would move quickly to avert any shortages, and the US was willing to use the SPR to moderate the supply. Even when the oil fields in Kuwait were burning, oil prices stayed stable.

If the President would announce a "test" sale of 5-10 Million barrels, it would once again send a signal to OPEC that we just might be sick of this price gouging that's taking place. They claim that they want a "target price" of 28-32 USD/barrel, yet here it sits at $50.00, and they do nothing.

So my opinion hasn't changed. I think that the US needs to send a clear signal to OPEC that unless they do something quick, then we will. They had the opportunity to do so during their last meeting, and they stalled it off. They announced a slight increase in temporary output, but did not raise any quotas. With oil at $50.00/bbl, the incentive is for them to do nothing, because they are reaping a huge windfall.

A little political hardball from the US would go a long way to rectifying the problem. We've waited so long now, that I doubt oil will stabilise at anything below $40.00/bbl now, and the longer we wait, the worse it will get. If we wait for it to hit $60.00, it probably won't stabilise below $45.00.

So I think it's important that we don't just continue to sit on our thumbs like a bunch of morons and pretend we're not getting screwed.

JMHO.

highsea
10-04-2004, 05:31 PM
<blockquote><font class="small">Quote Steve - Detroit:</font><hr>...for the record, I am very much against any tweeking of a freely traded commodity market by the government.<hr /></blockquote>I just thought I might add this. Oil is not exactly a "freely traded" commodity, in the sense you mean. OPEC practices collusion in the oil market, which would be illegal in the US.

Laissez Faire doesn't really work against a monopoly.

-CM

Steve - Detroit
10-04-2004, 06:29 PM
I agree wholeheartedly with your statement that “ultimately every barrel of oil in the world competes with every other barrel.” That is what makes it a world market and makes such a joke of the argument that the war in Iraq can’t be about oil because we don’t buy Iraq oil.

You say that OPEC practices collusion, which is true, but they identify an output number and usually hold to it for the most part. To a marketer, this is not much different than knowing a non-OPEC country’s output potential and factoring that into their equations for valuing the oil based on supply and demand assumptions.

Secondly, the situations in Iraq, Nigeria and Russia alone shouldn’t have that much effect on an individual basis but when taken as a whole they definitely have an effect on the total world supply. The market is made up of two groups, the hedgers, shedding risk, and the speculators assuming that risk for a potential profit. Why do you wish to punish the speculators for their function in the market place?

highsea
10-04-2004, 07:29 PM
<blockquote><font class="small">Quote Steve - Detroit:</font><hr>The market is made up of two groups, the hedgers, shedding risk, and the speculators assuming that risk for a potential profit. Why do you wish to punish the speculators for their function in the market place?
<hr /></blockquote>Well, that is a very good question. I guess I look at it like this. The oil market is made up of consumers and producers. The oil futures market is made up of hedgers and speculators, who "play" the market for profit.

I don't want to punish the speculators or the hedgers, I want to stabilise the market. How will this punish the speculators (or the hedgers, for that matter)?

Steve - Detroit
10-05-2004, 03:41 PM
Your statements aren't exactly true. The hedgers are hedging their physical positions, they ARE the consumers and producers in your description. The speculators are the ones "playing" the market for profit, but, they are assuming the risk that the hedgers are shedding. They don't hold the physical positions to offset their futures contracts.

They are being punished by the artificial price manipulation that dumping more oil on the market would cause. Its tough enough to deal with the unknowns like weather and political unrest in producing countries. I just don't feel the U.S. government should get involved by trying to tweak the prices.

highsea
10-05-2004, 10:45 PM
Steve, I guess I don't understand your terminology. Why do the consumers and producers fall in the same group? What about supply and demand? Also, how is it that they "shed risk"? As a consumer, it seems more like I'm getting screwed than shedding any risk.

I'm not sophisticated in the ways of the futures markets, I just see wild fluctuations in oil prices that seem way out of proportion to the actual supply and demand situation. I think that the government could remedy this if they had the desire to do so.

If a small drawdown of the SPR would have the effect that I think it would, that would indicate that the prices are artificially inflated. If it had no effect, than I would know that the prices are where they are because of supply and demand.

-CM

Steve - Detroit
10-08-2004, 05:38 PM
When you said “consumers”, I took it to mean the buyers of the crude, the people on the other side of the transaction. I see now that you meant you and me but to me, I’m not a consumer of crude, I’m way down the chain. Anyway, that’s what I meant, sorry for the confusion.

It’s all about supply and demand. I just read the other day that the world’s output capability is about 1% above demand. Hard to believe but if it’s true it’s understandable why the market reacts as it does to disruptions or even perceived disruptions. If you had tens of millions of dollars of delivery obligations, how much would you pay to make sure it wasn’t your company that defaulted because you couldn’t get the product?

As far as the futures market itself and the shedding of risk, if you are truly interested, I suggest you go to the NYMEX site. On the home page there are dropdowns along the top and one of them is “education”. Open it and there are examples of how futures contracts are utilized and it’s explained far, far better than I could ever do it.

I think that if you give it a few minutes of your time you will see why I think our bumbling fumbling federal government has no place interfering and why any release from the SPR would not have any lasting and meaningful effect on the price of oil.

If not, I guess its just something we’ll disagree on.

highsea
10-15-2004, 04:01 AM
Steve, I did as you suggested. That is some pretty confusing stuff. No wonder you didn't try to explain it. I will take your word for it, as it's over my head. There's like nine different ways to short sell, and nine different ways to bet long. Too much for a dumb fu*k like me, even if I did understand the terms.

I now don't care if oil get's to $200.00/bbl. I don't drive anyway, and the owner buys the boat fuel, so it doesn't really affect me anyway...

But just for grins, do you agree that a sale, like I suggested, could have the effect I think it would?

eg8r
10-15-2004, 07:07 AM
<blockquote><font class="small">Quote Steve:</font><hr> The speculators are the ones "playing" the market for profit, but, they are assuming the risk that the hedgers are shedding. They don't hold the physical positions to offset their futures contracts.

They are being punished by the artificial price manipulation... <hr /></blockquote> I am not a stock person at all, but the quote above is a little confusing. If the speculators are assuming risk, it would hardly be considered punishment should the risk not pan out. They are not being punished, simply, because they choose to survive in an environment that is laden with risk (interestingly enough, brought on by themselves /ccboard/images/graemlins/smile.gif ).

eg8r

Steve - Detroit
10-17-2004, 06:10 PM
LOL, dumb like a fox. If you're dumb, I'm dumber. Hey, maybe we can start a business, "Dumb and Dumber Charters". Need a first mate? I can bait hooks as good as anyone.

As to your question about a release by the guvmint. No I don't think it would have any kind of lasting effect. Maybe a blip down as a first reaction but right back up once its factored in. It's probably already factored in by the big johnsons who play and influence the market. Fear and panic are ruling right now and people are not going to be influenced by the small amounts that have been mentioned so far. I believe things will settle down over the next year or so but that's just my opinion.

Steve - Detroit
10-17-2004, 06:43 PM
I understand what you are saying, e, but to me, the government shouldn't be meddling in the market. You are right in that they play a very risky game, and the government dumping unexpected supply on the market is just part of the risk. I guess the problem I have with it is just that, its the government getting involved. I just believe, in the long run, the market takes care of itself. Supply will show up if the price is high enough just as demand will wane for the same reason.

Energy is a funny commodity, it just can't seem to match supply and demand. Highsea said it somewhere above, we're getting screwed, but don't we always? But rest assured, the big oils don't mind screwing us at all, vaseline is a petroleum product. /ccboard/images/graemlins/blush.gif

eg8r
10-17-2004, 08:17 PM
[ QUOTE ]
I guess the problem I have with it is just that, its the government getting involved. <hr /></blockquote> I agree, I believe gov't should do a better job of staying out of all private industry.

eg8r

highsea
10-18-2004, 05:02 AM
<blockquote><font class="small">Quote Steve - Detroit:</font><hr> I can bait hooks as good as anyone.
<hr /></blockquote>haha, okay, start tying up some leaders, we'll talk... /ccboard/images/graemlins/grin.gif

-CM

Steve - Detroit
10-18-2004, 02:15 PM
<hr /></blockquote>haha, okay, start tying up some leaders, we'll talk... /ccboard/images/graemlins/grin.gif

-CM <hr /></blockquote>

Bimini Twist or Australian Plait?

Chopstick
10-19-2004, 12:40 PM
<blockquote><font class="small">Quote highsea:</font><hr>

I now don't care if oil get's to $200.00/bbl.

<hr /></blockquote>

Funny you should mention that. I just saw a guy on TV who says that's what it's going to do. His point is that countries like China and others are developing their industries to the point that their requirements will drive oil prices up. They will become major consumers of oil like us and we can't do anything about that.

Another very interesting point was mentioned. At $75 a barrel refining gasoline from coal becomes practical. We are 2/3 of the way there now. I say let's go ahead and jack it up the rest of the way, start up the coal refineries, and tell those A-rabs to kiss off.

highsea
10-19-2004, 12:47 PM
Interestingly, China is working to wean themselves from ME oil also. They signed a big LNG agreement with Australia this year. I think the major dependents on ME oil in the future will be the EU. China and the US both see the instability of ME oil as a liability.