Tapping The Strategic Petroleum Reserve…Success or Failure?
On June 23rd, the Obama Administration announced that it would coordinate with other OECD countries and the IEA (International Energy Agency) to release a total of 60 million barrels of oil into the market. The US release, via the strategic petroleum reserve (SPR), accounted for 30 million barrels or half of the total. Details of how and when the oil will be auctioned off can be found in numerous articles and citations on the web.
Let me throw a few additional numbers on the table to put this in perspective…the US SPR contains about 725 Million barrels of oil, the US consumes 19M barrels each day, and the world consumes roughly 85 million barrels. So in the scheme of things, 60M barrels represents less than 1 day of global demand.
Some of the spin that rattled around the blogosphere compared this action to the Federal Reserve system, which among other things controls the money supply. At first glance this seems to be a worthy goal but a wild stretch of the imagination. For instance, by controlling the rate that banks charge each other for loans (the Federal Funds rate), the Federal Reserve has effectively varied mortgage interest rates from highs of 18% or more in the early 80’s to something near 5% today. Now that’s control. On the flip side, the fact that the administration is releasing oil from the SPR - for only the 4th time in 36 years - now carries the very real threat of market intervention, even if it is short lived. So the potential impact of a hypothetical future release at an unknown point in time to long positions on oil could be severe and therefore may have the intended effect of damping some of the short term price oscillations observed in the market.
Public response was immediate…according to Bloomberg, traders were taken completely by surprise and in fact there was discussion in the mainstream press that the move was intended to “drive speculators from the market.” Several OPEC countries vaguely threatened to retaliate by reducing output. As with anything that has to do with oil, politics followed at light speed. Many Obama administration supporters praised the President, describing the move as brilliant, while administration detractors described the very same move as desperate.
With all of that out of the way, I will comment that the action taken by western, oil consuming countries is attempting to get at one of the most corrosive aspects of the spot market - namely the vicious price spikes we’ve experienced over the past 3 or 4 years. In fact, all 6 of the last recessions in the US - stretching back to 1973 - have been preceded by oil price spikes. Most recently, the West Texas Intermediate (WTI) benchmark kissed $114 last April giving pause for concern that we are potentially entering a double dip recession. These spikes are essentially a tax on the economy and are very difficult for both short and long cycles businesses to respond to since economic things like pricing, and brick-and-mortar things like the cost to manufacture durable goods cannot change on a dime. If the spikes can be leveled out, the price of oil - by definition - becomes more predictable and therefore less corrosive to the developed economies of the west, even if the overall cost of energy is more expensive.
I make no judgment on whether the President’s move was an act of desperation, folly, or brilliance…time will tell. It has certainly raised some interesting discussions around other policy options that could potentially restrain - but not eliminate - oil market speculation.
I follow these things closely because they’re important and therefore want to keep score. So…with that in mind, I will continually update and tabulate the spot market price of oil for the next 6 months to assess whether the use of the SPR as a market management tool is working or not. Sorry…no fancy statistics. The price of oil is incredibly complex - a downward trend or an upward trend may have little or nothing to do with the SPR action. But President Obama will get the political credit or blame depending on the direction of the price of oil, and it will be fun to track.
Stop back and have a look at the data from time-to-time. I have started by tabulating the price of WTI below, spotting several key data points in the run up to June 23rd and will continue to tabulate each Friday when the market closes for the weekend. In a few weeks when more data is available I’ll plot it up as well.
A cursory look at the data collected thus far would indicate that oil was already on a downward glide slope prior to the announcement. Traders quoted in the press were blaming a bow wave of bad economic news. The immediate effect of the announcement on June 23rd was to drop the price by an additional $4+ per barrel. More recently, oil seems to have bounced back and stabilized at about the level it was at prior to June 23rd. We’ll see how this plays out as the oil hits the physical market over the coming weeks!
April 29 - $113.9 ‘peak price for 2011 YTD
June 02 - $100.2
June 22 - $95.4 ’oil price just prior to IEA announcement
June 23 - $91.0 ’oil price after IEA announcement
June 24 - $91.2
July 01 - $94.9
July 08 - $96.2
July 15 - $97.2
July 22 - $99.9
