Sell the Petroleum Reserve the U.S. government is sitting on a large reserve of oil, the Strategic Petroleum Reserve (SPR), which now holds about 700 million barrels of oil. This is enough oil to provide about 10% of daily U.S. oil consumption for a year. And if the U.S. government got smart about selling the oil -- a big if -- it would make money for the Treasury and help consumers by bringing oil prices down. Moreover, the government could make even more money, with minimal risk to the economy, by selling the SPR oil altogether. Imagine, for example, that the U.S. government began today to sell two million barrels a day and make up for the loss by buying today the same amount in the December 2008 futures market at $87.60. If it earned the spot price of $96.32 on each barrel and had a $1 per-barrel transactions cost, it would make $7.72 a barrel. The government would make daily profits of $15.44 million. If the differential in prices persisted, the feds would make $5.6 billion a year. This is chicken feed to the federal government but it would allow the feds to cut some tax that yields $5.6 billion. If the hated Alternative Minimum Tax is not reformed this calendar year, for example, it will capture about 20 million new victims. Reverse arbitrage would give these new victims an average relief of $280. (...) Assuming, as seems reasonable, a highly inelastic world demand for oil of about 0.2, this 2.4% increase would bring oil prices down by 12%, or about $12 a barrel, essentially wiping out the backwardation in oil prices and wiping out the gain to the U.S. Treasury. While oil producers would lose $12 a barrel, oil consumers would gain $12 a barrel. But it would not be a wash for Americans because the loss to U.S. oil producers would be only on their production, which is only 40% of U.S. consumption. So the net gain to the U.S. from a $12 per-barrel price drop would be $144 million a day (12 million of imports at $12 a barrel less) or $53 billion a year. Now that's real money. (...) There's an even more radical step the U.S. government should take that would benefit consumers also while benefiting the government. The government should sell the SPR oil and not replace it. If the government made even $80 a barrel on its 700 million barrels, it would make $56 billion, which is serious money even to the feds. Many will argue that selling the reserve is a bad idea because then we would be unprotected from the vagaries of world oil markets. This is false. Speculators who anticipate future shortfalls would act in oil markets the way they do in wheat markets, buying oil in anticipation of higher future prices. This would dampen future price increases in oil markets, doing a big favor for future consumers. That's better than the federal government does, which, even as you read this, is stupidly buying $90 oil to fill the SPR.
the U.S. government is sitting on a large reserve of oil, the Strategic Petroleum Reserve (SPR), which now holds about 700 million barrels of oil. This is enough oil to provide about 10% of daily U.S. oil consumption for a year. And if the U.S. government got smart about selling the oil -- a big if -- it would make money for the Treasury and help consumers by bringing oil prices down. Moreover, the government could make even more money, with minimal risk to the economy, by selling the SPR oil altogether.
Imagine, for example, that the U.S. government began today to sell two million barrels a day and make up for the loss by buying today the same amount in the December 2008 futures market at $87.60. If it earned the spot price of $96.32 on each barrel and had a $1 per-barrel transactions cost, it would make $7.72 a barrel. The government would make daily profits of $15.44 million. If the differential in prices persisted, the feds would make $5.6 billion a year. This is chicken feed to the federal government but it would allow the feds to cut some tax that yields $5.6 billion. If the hated Alternative Minimum Tax is not reformed this calendar year, for example, it will capture about 20 million new victims. Reverse arbitrage would give these new victims an average relief of $280.
(...)
Assuming, as seems reasonable, a highly inelastic world demand for oil of about 0.2, this 2.4% increase would bring oil prices down by 12%, or about $12 a barrel, essentially wiping out the backwardation in oil prices and wiping out the gain to the U.S. Treasury. While oil producers would lose $12 a barrel, oil consumers would gain $12 a barrel. But it would not be a wash for Americans because the loss to U.S. oil producers would be only on their production, which is only 40% of U.S. consumption. So the net gain to the U.S. from a $12 per-barrel price drop would be $144 million a day (12 million of imports at $12 a barrel less) or $53 billion a year. Now that's real money.
There's an even more radical step the U.S. government should take that would benefit consumers also while benefiting the government. The government should sell the SPR oil and not replace it. If the government made even $80 a barrel on its 700 million barrels, it would make $56 billion, which is serious money even to the feds.
Many will argue that selling the reserve is a bad idea because then we would be unprotected from the vagaries of world oil markets. This is false. Speculators who anticipate future shortfalls would act in oil markets the way they do in wheat markets, buying oil in anticipation of higher future prices. This would dampen future price increases in oil markets, doing a big favor for future consumers. That's better than the federal government does, which, even as you read this, is stupidly buying $90 oil to fill the SPR.
Sigh... "the mind boggles" does not even begin to cover it. Let's sell the strategic reserve to lower taxes for the rich for one year (by $280). Now that's a good idea. In the long run, we're all dead. John Maynard Keynes
Many will argue that selling the reserve is a bad idea because then we would be unprotected from the vagaries of world oil markets. This is false. Speculators who anticipate future shortfalls would act in oil markets the way they do in wheat markets, buying oil in anticipation of higher future prices. This would dampen future price increases in oil markets, doing a big favor for future consumers.
He's saying "We don't need physical oil reserves because the market shall provide!". Somehow the S for strategic in SPR is completely lost on him. You're clearly a dangerous pinko commie pragmatist.
Somehow the S for strategic in SPR is completely lost on him.
Strategic Petroleum Reserve You're clearly a dangerous pinko commie pragmatist.
Sigh.
Hey, maybe we should privatize the armed forces or the nuclear deterrent?
I mean after all, if they are needed, the market will provide. Peak oil is not an energy crisis. It is a liquid fuel crisis.
Global Strategic Reserves is useful background. I remember from my IPE days how our IPE Gas Oil contract delivery rules (in the Amsterdam/Rotterdam/ Antwerp area) had to take account of EU strategic reserve obligations.
The actual ownership of reserves isn't the issue here: it's the existence of them that's the point. Selling off stocks is one thing: draining them is quite another.
Many jurisdictions impose obligations on refiners to maintain minimum stocks of crude, which might at times not suit them financially.
For the US government to intervene in the market as suggested by carrying out a "reverse arbitrage" to take advantage of market backwardation does not seem to me to be a bad way of obtaining an income from a "dead" asset.
Any Central Banker competent in money market operations would be capable of managing this, and there is an analogy between the Central Bank as "lender of last resort" and that of the Strategic Petroleum Reserve.
My proposal would be to create a neutral "Oil Pool" entity - neither "Public" nor "Private" - in which all US storage could participate, and based upon the SPR.
Oil would flow continuously into and out of this Pool, and the "market price" is the spot price of deliveries into and out of the Pool.
Investors would be invited to acquire units in the Pool entity which gives them an entitlement to x barrels of oil or (better?) an equivalent carbon energy content.
Such units would in fact be "fungible" energy Value Units, and the oil would be held in the ownership of a neutral "Custodian".
These Units = "Carbon Dollars" would be accepted by the Pool, instead of conventional dollars (and at a different rate, since the prices would diverge after the launch date), for oil actually supplied to (say) a refiner who had bought them as a "hedge".
Such a neutral utility would allow both the SPR and private stocks to be sold off to Investors who are interested in hedging against energy price rises, thereby releasing "dead" capital.
It would form the basis for an extremely liquid asset class of energy units.
And more to the point, such "energy units" could become what is essentially a "Carbon Dollar" with an energy-based value in exchange independent of the Fed "deficit-based" Dollar.
Moreover, such "Carbon Dollars" - based upon energy content of carbon fuels, make infinitely more sense than basing a carbon currency on the carbon in emissions.
So, draining reserves would be the act of a clown, for sure, but with a bit of imagination the strategic necessity for energy reserves could be used as a basis for a more rational market.
"Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
Who decides whether the investor can exercise his entitlement - he himself or the custodian? If it's the latter, wouldn't the lack of discretionary power make the units less attractive/valuable to the investor?
As for the "reverse arbitrage", I take your point in principle, but as a practical matter I don't see it as possible for the next 15 months + n. The band of ideologues in power holds government - both the idea and the actual administration of the public's - in such contempt that it does not occur to them to appoint competent people and expect them to perform quality work. The fact is that what we're experiencing right now is a top-down disaster. -Paul Krugman
Who decides whether the investor can exercise his entitlement - he himself or the custodian?
The custodian does nothing itself other than "own" the infranstructure and oil etc in it: the Pool would be operated and managed by a "Pool Service Provider" consortium.
Only an oil user Pool member(eg a refiner) with a supply agreement with an oil supplier/distributor Pool member would have the choice of exchanging the "value unit" for actual crude oil, rather than tendering Fed dollars.
This is a disintermediated model, and delivery would not be from the Pool as intermediary, it would be from other Pool members through the Pool relationship/protocol.
Essentially Units would be oil-specific "legal tender". But a holder of Units would not be able to demand delivery in the way he could with (physically deliverable) futures contracts. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
It is already the case (certainly in the EU) that there is a requirement for a certain level of inventory to be kept, either in addition to, or instead of, government owned stocks maintained in government owned storage.
Depending on whether the market is in backwardation or not this requirement can cost refiners a lot of money.
My proposal allows them to sell this material in appropriate market conditions, and to buy it back as they see fit - and thereby make better use of the capital.
For the financial investors to whom they sell the purchase of units is to all intents and purposes the same as buying shares in an "Exchange Traded Commodity" fund. ie they get no income from their investment (as with gold) but they will profit from a price increase.
An "energy unit" is in effect an "un-geared" and "undated" forward agreement. If gearing is required, a buyer may always borrow trhe unit purchase price, or possibly use options.
There is a significant benefit in terms of costs of maintaining their position, however, because the conventional ETC model means that Investors get hit when by very significant transaction costs when the Fund vehicle "rolls over" the necessary futures contracts.
The outcome could be to free suppliers/distributors from capital constraints, and to allow them to become a pure service provider. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
And now this guy wants to sell the strategic oil reserve? We have met the enemy, and he is us — Pogo
