Tapping the Reserves
In a briefing room statement, the Biden administration blames oil companies for high prices and announces the U.S. Joins With China, Other Nations in Tapping Oil Reserves.
Here are a few key snips that detail the announcement and Biden's plan.
There is mounting evidence that declines in oil prices and the costs of other inputs into gasoline are not translating into lower prices at the pump. Last week, the President asked the Federal Trade Commission to examine what is going on in oil and gas markets and to consider “whether illegal conduct is costing families at the pump.”
The Plan That Can't Work
Today we are announcing that the Department of Energy will make available a release of 50 million barrels of oil from the Strategic Petroleum Reserve to lower prices for Americans and address the mismatch between demand exiting the pandemic and supply.
This release will be taken in parallel with other major energy-consuming nations, including China, India, Japan, the Republic of Korea, and the United Kingdom. This is the first time we have done something like this in parallel with other major energy-consuming nations.
Part one of the plan involves what’s called “an exchange.” The oil market is currently backward-dated, meaning that the markets expect prices to decrease into 2022 from around $80 barrels — $80 per barrel now, to $62 per barrel by the end of 2022.
But as the President has said, consumers are facing pain at the pump right now. Accordingly, we’re deploying this exchange mechanism of up to 32 million barrels to get more supply of oil from the SPR out quickly to reduce the current impact on consumers.
Under the exchange, market participants will take oil now and return it later when prices are lower, with a premium of additional oil coming into the SPR.
Part two of the plan involves a sale of an additional 18 million barrels from the SPR. These 18 million barrels are ones that Congress has already required us to sell but we have flexibility when, specifically, to do the sale. The execution of the sale will follow the exchange and could be noticed as soon as next month.
Strategic Oil Reserve Purpose
The Strategic Petroleum Reserve is a stockpile maintained by the Energy Department to preserve access to oil in case of natural disasters, national security issues and other events.
The reserves are stored in caverns created in salt domes along the Texas and Louisiana Gulf Coasts.
Oil Reserve Process
Released oil from the U.S. reserves can take as long as two weeks to reach the markets from where it is stored in underground salt domes, which measure as long as 2,000 feet. To get oil out, fresh water is pumped into the bottom of the cylinder, forcing the oil upward, out of the cavern and into pipelines that carry the supply to refineries that convert it into gasoline or other petroleum products.
The above snip from the WSJ.
Price manipulation is not strategic and should not even be attempted.
Oil rose despite the news.
If prices decline later, it will not be due to release of reserves but rather because of natural forces.
In 2020, the US consumed 18 million barrels of petroleum per day.
Given the recovery consumption rates to be much higher in 2021.
The Biden Administration will release 32 million barrels then another 18 million next month.
Whoop T Doo! That's less than 2 days' worth of oil immediately and another day's worth next month.
What the hell is that supposed to do?
I said "Tapping Reserves Will Fail".
Judging from the market reaction, a $2 rise, it already has. And looking ahead, 2-3 days of supply is essentially meaningless, better saved for a true emergency.
What a clown show.
Thanks for Tuning In!
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