The release of 60 million barrels of crude oil from the international Strategic Petroleum Reserve is at best an exercise in futility, and at worst a blatant political abuse of something that should be reserved for true strategic crises. This is supposed to be for major supply disruptions of a significant magnitude. That was the case during Hurricane Katrina, which disrupted almost all production from the Gulf of Mexico. That the current move is ostensibly to supplement supplies due to the interruption of shipments from civil war-torn Libya is specious at best (more below.)And that the powers-that-be have openly admitted a significant driver behind yesterday’s action is their consideration that the weakness of the global economy a ‘crisis’ revisits a point we made previous. Part of the return to the 1970s politico-economic environment is the degree to which pronouncements from the political class sound so disconnected as to be literally incredible (i.e. lack any credibility.)
And that certainly appears to be the case here. The major US action releasing 30 million barrels from its Strategic Petroleum Reserve in coordination with other International Energy Agency participants releasing another 30 million is nothing less than politicians looking panicky about public disappointment with the weakness of the economic recovery. And there were many other, more meaningful solutions available that would have further weighed upon already weakening energy prices in a far more sustained and significant manner. In the event the US administration is using a short-term, ultimately ineffective cheap-shot approach to offset some of the damage from its significantly failed economic and energy programs. This looks like nothing so much as Enviro-Socialist Barack Obama attempting to bolster his extremely weak poll numbers; substantially driven by rapidly disintegrating support for his approach to the economy.
However much the Obama administration and other developed country leaders would like to believe this is a progressive step to help “the people”, their action yesterday is very risky and likely self-defeating on both the political and economic levels. Let’s leave aside for a moment that most economists have dismissed this action as silly and/or irresponsible, and explore a few points about what has actually occurred. In the first instance the amount of oil they released is not going to significantly affect the price for very long. For all of the impressiveness of a figure that includes many, many millions of barrels of oil, it is about 75% of a single day of global crude oil usage. On a purely economic level that will not restrain prices for very long.
Secondly, and as important on a psychological level, this was supposed to be a ‘warning shot’ aimed at OPEC in response to the cartels failure to increase its output and its recent meeting. As seasoned poker players in a previous incarnation, we have a bit of advice for the powers-that-be who thought they were making such a strong point: don’t attempt to overbid another player who has an unlimited supply of chips. Did it occur to be developed country powers-that-be that if an OPEC that was disciplined enough to not raise production at their last meeting doesn’t like the drop in the price of oil they can choose to cut production? And when it’s all said and done, OPEC as a far more significant ability to cut production than the developed Western nations have to release crude oil from their strategic reserves. As such, on that front this exercise is nothing less than one in futility, and will possibly even be counterproductive.
And exactly what ‘critical’ shortage of oil is it that the developed nations were trying to offset… the lack of exports from Libya? Let’s put that in perspective. We have it from an informed source that the lack of Libyan exports is a very negligible issue for US refiners. So what did the US gain from its effort? Further, as a bit of additional perspective, the production of oil from the Gulf of Mexico is 70 times that which flows from Libya; even Saudi Arabia produces 13 times as much oil as Libya. So where’s the crisis?
We’ll tell you where it is: US employment and affordable energy. And that’s where Mr. Obama and his administration have failed most miserably of all. Enviro-Socialist policies have gone a significant way toward gutting what was left of the US energy production industry. With most of the onshore US oil drilling restricted by environmental regulation, the offshore industry was the real focus of US production. Of course, that has now been significantly diminished as well in the wake of last year’s Gulf of Mexico British Petroleum disaster; and isn’t really looking like it’s going to be coming back anytime soon. A significant portion of higher energy prices can be laid at the feet of the United States, and it’s benighted, draconian restrictions on energy production.
And make no doubt about the fact this is definitive policy, not something that is happened through some sort of unintended consequences. That has become curiouser and curiouser across time, as Mr. Obama and his Enviro-Socialist kindred spirits have exerted significant control over US government agencies as well as policy that has actually been passed into law by Congress. While it’s not within the purview of this specific comment, the Taxulationism (combined impact of higher taxes, regulation and the subtle implementation of protectionism at the margins) of which we spoke last year remains a major problem for US companies and the economy. Suffice for now to say that the lack of US reauthorization of the offshore drilling licenses in the Gulf of Mexico is sending the rigs necessary to provide that source of energy to the US to other parts of the world.
And then there was the seemingly craziest effort of all that came out on President Obama’s recent trip to South America. His press conference with the President of Brazil on the first leg of that trip included his commitment to providing Brazil “technology and support” to significantly expand its offshore drilling and oil production capacity… And that the US would be very happy as a strong consumer of Brazilian crude oil. Say What??! With the US so far in debt and the fiscal deficit so far out of balance, is this really an at all acceptable use of US taxpayer dollars? So while he talks about energy independence and addressing the US trade balance, he literally told the Brazilians that we will help them turn the USA into a client for the purchase of their oil production. Only someone so deep into the environmental thicket that they truly cannot see the forest for the trees could possibly have made such a statement/commitment.
Which is why it is not very hard to imagine that this was nothing more than a cheap-shot, temporary expedient to lower gasoline prices at the pump and raise his standing with the American consumer/electorate. And it’s no secret that this comes into the beginning of the summer driving season. Yet, the other factor that means it was a completely meaningless gesture is that the form of the US release from the reserve will be a sale, not a financially neutral disgorgement. Even though that would seem to say that at least they got the financial side of it right by reaping income from the release of the oil stocks from the Strategic Petroleum Reserve, it makes it a market neutral exercise in the intermediate term. As much as they have unleashed some extra supply at present, they will need to repurchase the oil in order to restock the reserve.
And when that occurs, there will be an equally offsetting demand that will render this only the most temporary and ineffective manner in which to address the ongoing energy supply shortage. Only greater exploration, drilling and production within the continental United States will address the dual energy and trade balance problems. Unfortunately, that is something which the Enviro-Socialists will fight tooth and nail. So there is no real solution in sight as long as the left wing of the Democratic Party exerts so much influence on policy and politics.
And in the meantime, look for the US economy, markets and people to suffer further as the intended and unintended consequences of all of the taxes and regulation that have already been passed in the law continue down the pike. That’s the real reason businesses are not comfortable investing any of their record levels of capital reserves, and there doesn’t appear to be any end in sight. Of course, that means Mr. Obama’s poll ratings will continue to be miserable. It will be interesting to see if the current lack of excitement by the opposition for any of their presidential candidates evolves into something more enthusiastic and definitive into next year when this all becomes more critical once again.
EXTENDED MARKET IMPLICATIONS
There’s really not much more to say than the implications discussed in yesterday’s Rohr-Blog post on Bernanke failing the confidence vote due to the weaker forecasts and how little he had to offer in the way of any further economic support. Just to revisit the most telling of the implications that relate specifically to the drawdown from the Strategic Petroleum Reserve, what has been most important of late in the energy markets is August Crude Oil’s failure below the 95.50-94.50 support. In the wake of that we had already suspected that the 92.00 support would not be very credible. While there is also some psychological support in the 90.00 area, the more major supports always were going to be into 87.00 and below.
It is also of passing note that since our update to the Current Rohr Technical Projections – Key Levels & Select Comments this morning the September S&P 500 future is already back below 1,274-69 without having pushed above the 1,280 area during the day session (even though it squeezed somewhat above it in overnight trading.) Of course, that has had the expected counterpoint influence on the US dollar and government bonds, both of which have strengthened in the wake of equities weakening once again.
Thanks for your interest.