$4 Gallon Gasoline on the Horizon

Investment Analysis Clubs Macro Economic Trends and Risks
21

Well, I was responding to the $4 a gallon part of the OP, not the strategic reserve part. We Californians often laugh under our breath when people elsewhere complain about high gas prices. CA consistently is near the top of nationwide gas prices. Living in paradise does come with some costs. :wink: On the other hand, we as a country have one of the lowest gas prices in the world. So I don’t see a lot to complain about there.

But since you want to discuss the strategic reserve too, let’s do that.

My basic question: Are you in favor of lower gas prices and therefore a release from the SPR to reduce gas prices? Or are you in favor of rebuilding the SPR and therefore even higher gas prices as the DOE adds their buying to current demand, driving oil prices up?

Then let’s talk absolute size. The SPR is authorized for a maximum of a little less than 730 million barrels of oil.

Daily US oil consumption is about 20 million barrels of oil.

So at its maximum capacity, the SPR provides about 1 month of oil consumption. (Divide 730 by 20)

The current level is about 370 million barrels - 18 days.
https://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=WCSSTUS1&f=W

The SPR was established in response to the energy issues of the 1970s. It was meant to deal with potential foreign disruptions to the US energy supply. At that time, we were importing 5 to 8 million barrels of oil per day. Today, we are at approximately zero net imports. In 2020 and 2021, we were actually a net exporter of oil.

While I didn’t look up the data, my recollection is that we slipped back to the net import side of the ledger in 2022. But we are still far from importing the levels of oil that we did in previous decades.

At the moment, I’m not sure the level of the SPR is all that important to energy security. With a bit of conservation and a bit of loosening of some production regulations, we can easily supply all of our own petroleum without dipping into the SPR at all. It might just take a slightly higher price of oil to make some marginal oil production financially viable again and get us on the net export side of things.

While I agree that the SPR is important for the long term, at the moment I don’t think it’s critical to start refilling it quickly again. I’d be in favor of some small increases to the SPR, perhaps buying up a 100k to 200k barrels of oil a day. That’s about 1% or less of the current daily use, so shouldn’t have a severe impact on prices, but would still add up over time. If market prices dropped again, those purchases could be stepped up to keep prices from falling too far and pushing some domestic fields out of production.

–Peter

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22

Nope, but I am in favor of using the SPR to normalize volatile swings in oil prices which can have a disruptive effect on the economy.

We do it for vegetables (farm price supports) and we do it for the greater economy, especially home buying and business investment (Fed rate), heck, we step in and take over failing banks to stop a contagion which would disrupt the economy (see: history dating back, well, forever.) All of the programs operate differently, obviously, but all have the purpose of smoothing out the manic market for the benefit of everyone.

Why wouldn’t we do it with the single largest energy input affecting virtually every sector of our economy?

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23

I don’t disagree, but that would involve changing the purpose of the SPR. It’s focus is on supply disruptions, not on price stability.

The Strategic Petroleum Reserve (SPR), the world’s largest supply of emergency crude oil was established primarily to reduce the impact of disruptions in supplies of petroleum products and to carry out obligations of the United States under the international energy program.

–Peter

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24

Would not a cut in OPEC production be a supply disruption?

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It only went “negative” for one contract ending in a very short time. The reason it went negative is because there weren’t enough customers that could take physical delivery due to all their storage tanks being full or near full. The same applied to the SPR, it was full at the time.

There’s no way to know. That’s why it’s called “Strategic Petroleum Reserve”, it’s for emergencies. If you can ensure that no emergency will happen over the next year or two, then sure, it can be filled then.

I’ve been discussing this since last year, and I previously suggested a few months ago when the futures were pretty cheap, that staggered futures be purchased. It would have been the ideal scenario. The phenomenon is called backwardation, when future oil is cheaper than current oil. Here’s an article that discussed it back then - https://stockcharts.com/articles/tac/2022/07/a-curious-backwardation-behavi-845.html

Exactly! Staggered oil futures going out a year, or two, or even 3, or more (they go out many years*) would have accomplished this handily. Still can, but at somewhat higher prices now.

* For example, people traded Dec 2028 and Dec 2029 oil futures recently.

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26

Ya, it was more a facetious example meant to illustrate that there are times when it makes sense for the government to buy up excess supply - whether that be oil (or bonds) to both add stability to markets and to frankly take advantage of such significant price disparities.

I also think we should have been issuing 50 yr treasuries for the last decade when rates were effectively zero. We could have repaired all of our infrastructure and made 5G available nationwide and not have to pay it off for another 40 years.

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27

Any trading of oil futures after 2025 is dangerous. I am all done with oil and coal for years now.

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Nobody is suggesting “trading”! The idea is to buy the futures and actually take delivery (into the SPR) when those futures expire.

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The institutions are currently having a lot of troubles from the 10 and 20 year treasuries. You want to load them up with 50s? There’d be nothing left right now.

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30

Pretty much two sides of the same coin.

Although I do think it was originally set up to provide us with enough fuel to supply the military in case we went to war in the Middle East and were complete cut off from those supplies. There was a time when that would have brought us to our knees.

It would be devastating for the economies of most middle eastern countries, too (perhaps not Saudi Arabia which has multiple hundreds of billions stacked up in wealth funds and basements across the land) so it would be disruptive there, too, but the damage would be far greater to the US than, say, Libya which doesn’t have an economy to begin with.

31

Yes, you keep preaching that oil and gas are over. Curiously, it keeps not happening that way.

The whole history of the human race is energy: fire from wood, then coal, then oil derivatives, then multiple sources like hydro, solar, geo, nuclear. The only one of those showing even modest signs of leveling off is coal, perhaps the dirtiest and most difficult to move of all of them.

Car ownership is soaring in developing countries, and that is, and will continue to be based on petroleum for some time. They just don’t have the infrastructure, or the money to convert to electric vehicles in great numbers. As their economies modernize it is going to be coal and oil for a good while, but I acknowledge there will be a fracturing of energy sources, so oil might not grow as fast as it otherwise would but it’s still going to be the dominant fuel source for years, and probably decades to come.

I’d love to get my fairy godmother to change that, of course, but that is as likely as the Boston Bruins fielding an all black hockey team next year.

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32

Interesting that Ford and GM have abandoned, or are failing, in higher growth markets. Both companies abandoned India. Ford abandoned all of South America.

GM sales were down 20% in China in 2022, to 2,303,100

https://gmauthority.com/blog/2023/01/gm-china-sales-figures-numbers-results-2022-calendar-year/

Ford is a bad joke in China. Falling from 900,000 units and a 4% market share in 2016, to barely 250,000 units and a 1% share last year. So what is Ford’s plan? Drop lower priced models and push ATP higher and higher in Shiny-land, apparently.

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33

I wish you would stay on topic in your responses. My statement was about oil only, not natural gas.

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34

Is it, really?

Price instability can come from the demand side - whether it’s “phooey on the environment, I want my monster truck and my Corvette”, or “quit buying ICE cars and drive with electricity produced by the sun.” Both can be (and might already be) contributors to price instability. Or a sudden shut down of a nuclear plant pushing electric generation to natural gas plants. Or Congress flooding people with money, raising the price of everything, then a reaction by the Fed raising interest rates and causing a recession. (Never mind that last one - it’s too far fetched to actually happen.)

While buying or selling oil from the SPR will affect prices, those will only be short term effects. They’re not a long term way to achieve price stability. Long term stability comes from other sources, like domestic production rather than imports.

–Peter

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35

Coal and nuclear are not really growing:

Coal electrical power generation globally is the same as it was in 2013: IEA: Global Coal Power Generation to Reach a New High in 2022 - Clintel

Nuclear electrical power generation globally is the same as it was in 2006: Nuclear Power Today | Nuclear Energy - World Nuclear Association

Oil is going to see a decline in global consumption in 2025 because of electrification and alternative fuels for transportation.

36

I hope you see the irony in telling me that coal is going down, while referring me to an article headlined “Coal Power Generation To Reach A New High In 2022”.

And going to your nuclear chart, I notice that it (along with most energy) took at hit in 2008 and has been rebuilding since. That’s a slower industry, obviously, as you can turn them on quickly but it takes years and years to add brand new capacity. I am pretty sure there will be more over time.

The only thing that seems to dampen our enthusiasm for more energy of all sorts is recession and/or collapse of economies, or other huge macroeconomic events. Perhaps war will do it, but otherwise, the number continues to rise, not in a perfectly straight line, and with bumps and bruises along the way, but rise it shall.

Chill. I was referring to gasoline. Although it’s also true with natural gas. Gasoline powers cars. Oil derivatives power airplanes and trucks and factories and farms and all manner of things, including plastics and roads. You think those are going away?
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37

As I have shown in other posts, oil

38

No irony at all. You as usual did not read the article which shows that coal is flat out to 2024.

39

Wrong again. Nuclear industry took a hit in 2011 after the Fukushima nuclear disaster. And many nuclear plants were shutdown for safety concerns. Some plants have come back after many safety upgrades. The nuclear industry spent billions upgrading nuclear plants as a result of Fukushima.

Vogtle 3&4 have scared of most countries from ever building large nuclear power plants because of cost and schedule. The SMRs may have lower cost and schedule, but I am concerned that they will not be able to compete with renewables. SMRs may the OK in some locations that have only small amounts of renewable energy.

40

I never said oil is going away. I said peak oil demand will occur in 2025. After 2025 oil is on a long downward trend with less investments in new oil and refineries by oil majors and and governments. With less oil investments and consumption stock prices will decline.