✌️ Welcome to the latest issue of The Informationist, the newsletter that makes you smarter in just a few minutes each week.
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Today's Bullets:
What is the SPR?
Why has it been drawn down?
Has the Great Drain worked?
What are the implications?
Inspirational Tweet:
We heard quite a bit about the SPR or Strategic Petroleum Reserve last year when the stores at the facility began to fall in 2021. And with oil prices spiking lately, SPR has returned to top of mind these days. In fact, according to @KobeissiLetter, there are just 17 days of supply left in the SPR reserve.
That sounds quite alarming.
But what exactly is the Strategic Petroleum Reserve? Why have stores dropped so dramatically? And what are the implications?
And most importantly, are Tweets like the one above merely alarmist?
Plenty to unpack here and important questions to be answered. But have no fear, we'll sort it all out for you, nice and easy as always.
So, grab that cup of coffee, saddle up, and settle in for a short walk through the US oilfields today with The Informationist.
🛢️What is the SPR?
First of all, the Strategic Petroleum Reserve is a critical component of the United States' energy security infrastructure.
But why, and how?
See, back when I was a kid in the 1970's, I have a memory of sitting in the backseat of my Mom's rusting pea-green Buick at the back of a long and winding line of similar cars, waiting patiently for our turn at the gas pump.
But we were lucky.
Because it was Odd Day for rationing, and since our license plate ended with an odd number, we could buy our allotment of gas for the week.
Four whole gallons at four times the price from just a few weeks before.
But super lucky, because it meant Mom could drive me to hockey that day.
If we could get through the line in time.
Usually a two hour wait.
End reveal: we made it.
But why was gas being rationed? And why so severely?
It was all because of the 1973 Oil Crisis.
Also known as the First Oil Shock, the crisis began on October 17, 1973, when the Organization of Arab Petroleum Exporting Countries (OAPEC) proclaimed an oil embargo against the United States and its allies for supporting Israel during the Yom Kippur War.
The embargo lasted until March 1974.
But high gas prices and tight inventory lasted for years, well into the late 70's and early 80's, when the Iranian Revolution started it all over again.
The second oil shock.
Because the US was not energy independent, it had no choice but to suffer the wrath of the Arab oil giants with little recourse.
The response?
We created something called the Strategic Petroleum Reserve or SPR, as we will refer to it from here-on out today.
The SPR is the world's largest supply of emergency crude oil, housed in four storage facilities across Texas and Louisiana.
Remember that key word: emergency.
We will come back to that.
With a total capacity of 727 million barrels, the oil stored in the SPR can be released under specific conditions, including a severe energy supply interruption or significant adverse economic effects stemming from disruptions in oil supply.
And so, over the ensuing decades, the US accumulated over 700 million barrels of oil to never have to go through a shortage, massive spikes in prices, and gas rations again.
With domestic crises caused by natural disasters, like Hurricanes Katrina, Gustav and Ike, we were able to navigate shortages and disruptions without the same extreme and nationwide impact of the 1973 Oil Crisis.
A brilliant strategy.
For emergencies, that is.
🤨 Why has it been drawn down?
If you haven't been captured by the current-popular-social-distraction Mexican twin aliens, then you've likely noticed that we've been experiencing steep and painful inflation the last two years.
And the largest component or driver of inflation is?
Energy.
After all, it requires oil, gas, and natural gas to power energy plants, manufacturing facilities, distribution facilities, and the trucks shipping all the goods we consume.
As well as a whole lot more energy-related input costs for goods and services.
And inflation, my friends, is bad for optics. Not just US dollar optics, but political optics, too.
It's difficult to be re-elected when voters' wallets feel thin.
Fix inflation, fix the vote.
This is why you see press secretaries and Presidents gaslighting about how great they are at reducing inflation, helping bring costs down for everyday American people...
Or some other version of the same nonsense.
But they know if they can reduce the cost of energy, they can can reduce the cost of goods.
You see where I'm going with this.
And you got. The President and his cabinet, in all their wisdom, declared something of an 'inflation emergency' and began tapping the SPR to flood the market with barrels of oil in order to lower the cost of oil and gas.
And energy overall.
So, how much have they drained out of the reserves for this inflation emergency?
Would you believe ~290 million barrels?
Ladies and Gentlemen, I give you the Great SPR Drain:
Question is, was the drain effective in bringing down the cost of oil and hence, energy, and hence, overall inflation of goods and services?
Let's peek at that next.
🧐 Has the Great Drain worked?
Looking at the SPR drawdown and charting that against the price of crude oil futures, it certainly appears to be strongly correlated.
Conclusion: if you dump hundreds of millions of barrels of oil on the market, then the price of that oil goes down.
And the price of goods and services?
Well, though they have not exactly gone down, as the White House and its administration would have you believe, the pace of increase has slowed dramatically in the past year.
Notice the correlation to energy prices?
Energy prices down, inflation eases.
But do you also notice the kick up at the end of the chart?
Now peek back up at the chart right above it, and have a look at the kick up in energyprices.
Yep. Energy prices back up, inflation back up.
😱 What are the implications?
First, it appears that draining approximately half of the entire the SPR only helped to bring inflation down from ~9% to ~3% (at the trough).
Operative word here: helped.
Because, the Fed raising rates by over 5% in that time certainly helped, too, of course. We are certain to see some lagging effects of that, for sure, as many of you have heard me say recently.
But with OPEC+ (mainly Saudi Arabia and Russia) cutting production of an additional 1.3 million barrels per day, the price of oil surged recently, nearly hitting $100 per barrel.
That surge has eased this past week, as high prices have hurt demand for gas, diesel and jet fuel. Further weighing on prices are the combination of higher interest rates (creating a stronger dollar) and expectations of a weakening economy.
Remember, in 1971, we convinced the largest oil producer in the world, Saudi Arabia, to price oil in US dollars.
As a result, they share an inverse relation: a stronger dollar means lower oil prices.
Why?
Foreigners can't buy as much with their own weaker currency having to be converted into dollars to purchase the oil. But who knows how long this reprieve can last.
Because the US Department of Energy (DOE) has been actively trying to refill the pilfered SPR at the same time prices started spiking.
Think the Saudis and Russians knew that when they cut production?
Yeah, me too.
But that's not the big problem.
The big problem is that with the SPR now cut in half, as @kobeissiletter pointed out above, we have only about 17 days of supply left for the country in the event of a major disruption or attack.
17 days.
We get that number by simply dividing the current level of oil in the SPR by the daily oil consumption rate of the US.
351 million barrels of oil in the SPR / ~20.5 million barrels consumed per day = 17.14 days.
And this assumes that all the oil in the SPR is viable for refining.
In reality, there are serious concerns about the quality of oil stored deep in the SPR. Specifically, toxic levels of hydrogen sulfide (H2S), a damaging pollutant commonly found in crude oil. Also, some oil is rendered unusable due to the formation of brine layers (high concentrations of salt) in the crude storage caverns.
Bottom line, nobody knows how much of the actual SPR is usable, and it is reasonable to assume a significant percentage of what is left is not usable.
But wait.
Some of you may ask, isn't the US the largest oil producer in the world? So, we don't needSaudi or Russian oil. We could just use our own.
True, but it's not quite that simple.
First, The US cannot refine all the oil it produces, as many refineries are not equipped for the type of oil we produce. This is why we import so much oil at the same time we export it.
Also, even though we are producing, it takes time to bring oil out of the ground, transport it to refineries, refine it, transport it to distributions centers, and then finally distribute it to the pumps.
This is often not a smooth process. Can you imagine if it needed to operate flawlessly, everywhere in the nation?
To put it simply, this would most likely produce massive delays and shortages in many regions of the US.
And even more simply, a large scale disruption to our energy supply would be catastrophic to the economy.
Bottom line, with all the tension in the Middle East, we've been playing a dangerous game here with our SPR, draining it for what is clearly political motivation rather than a trueemergency or disruption to our major energy supply chains.
As a result, I expect continued volatility in the price of oil, and hence gas, in the near future.
Also, unless the US hits a recession soon, the price may remain too high to equitably re-stock the drained oil.
And if we get a recession, that isn't good for re-election is it.
Any way you cut it, draining the SPR seems to have been a fools play, at best.
And at worst?
It could prove to be a devastating error.
That’s it. I hope you feel a little bit smarter knowing about the SPR and how it can affect us in peace and war times. Before leaving, feel free to respond to this newsletter with questions or future topics of interest.
If you enjoyed this newsletter and found it helpful, please share it with someone who you think will love it, too!
Talk soon,
James✌️
*IMPORTANT NOTE*
I wrote this issue the morning before war broke out in Israel. This serious development could clearly have implications for the overall stability in the Middle East and, of course, the price and volatility of oil. I will be watching closely and sharing thoughts on Twitter and/or upcoming podcasts.
Stay safe out there. ✌️