From Grant Williams' Things That Make You Go Hmmm
After the attack on ‘speculators’ failed to lower gas prices (here’s a piece of free advice by way of a simple mathematical equation for anybody in the current Administration who may be reading: ZIRP ? Low Gas Prices), it was the turn of the other staple solution to an intractable problem; the US Strategic Petroleum Reserve (SPR):
(Montreal Gazette): A group of Democratic lawmakers in the U.S. House of Representatives is again urging President Barack Obama to aggressively use the threat of releasing oil from emergency reserves to rain on speculators driving up oil prices.
The three lawmakers are gathering signatures from others in Congress for a letter to Obama to press him to wield the 696 million barrels of oil that the government stores in salt caverns as a weapon against “rapid price escalations resulting from speculation in the oil markets.”
Last June (the 24th to be precise), it was announced that 60 million barrels of oil would be released from world reserves, with about half of that amount being taken from the SPR. Oil was trading at $91 when the announcement was made but actually rose in price - hitting $97 - before dropping to $88 once the surplus oil was introduced on July 15.
60 million barrels = $3 lower price. Hardly bang for the buck - especially as oil was back above $100 before the end of the year.
As much as the SPR is seen by many to be the panacea for high prices, the lack of available additional supply from the world’s biggest producers is a far bigger concern; one which my friend Ronni Stoeferle from Vienna wrote a fantastic report on recently entitled “Nothing To Spare” (you can email Ronni HERE for a copy of the report which is an incredibly detailed piece of work). In it he took an in-depth look at some of the supply constraints facing the world and his conclusions are, to say the least, troubling:
The still low reserve capacity makes the oil price vulnerable to geopolitical tensions. With the exception of Saudi Arabia, no country holds any significant reserve capacities. But since Saudi Arabia has never exceeded the barrier of 10 mbd on a sustainable basis, we harbor doubts as to whether the country can actually produce 12.5 mbd. Risks are that it will take a supply side crunch to find out whether the alleged reserve capacity actually exists to the extent proclaimed. At any rate, the decision of IEA to tap the strategic reserves during the Libya crisis is a clear indicator of the strained supply situation.
Ronni goes on to examine the price forecasts of many major oil producers and their projections also point the way to higher prices:
A comparison of the oil price forecasts from various oil producers reveals that, in the period of 1999 to 2010 Mexico, Saudi Arabia, and Russia made the most accurate forecasts. All three of them also came closest to the actual price last year, which is why it makes sense to listen to their expectations. For 2012 they predict substantially higher oil prices. Saudi Arabia expects an average WTI price of USD 97, Mexico forecasts USD 116, and Russia USD 120/barrel. Iran has given the highest forecast at USD 137/barrel.
But these producers have their own problems - most notably the Gulf States who, in order to calm tempers amidst last year’s Arab Spring, handed out billions of dollars to placate their angry citizens which has driven up their breakeven cost to between $80 - $90 per barrel. In fact, the sheer magnitude of the Saudi “stimulus package’ was simply staggering. Ronni again:
The Saudi Arabian “Day of Rage” in March was without any consequences due to the generous governmental handouts. The economic stimulus package worth USD 130bn contained a wage increase of 15% for civil servants, an increase in the minimum wage, cheques for two months’ salary for civil servants, and an unemployment program.
Almost USD 70bn will be invested in the construction of 500,000 social flats, and all mosques across the country will be renovated. Overall, the package equals more than 20% of the Saudi Arabian GDP (by comparison, TARP in the US accounted for 5% of GDP).
Clearly, talk of speculators is (as it invariably is) a convenient attempt to find a scapegoat for a problem that doesn’t sit well with the public (incidentally, in an in-depth study that I won’t even bother conducting, it was proven that scapegoats are extra-convenient in election years), but the real problems are far more complex and far less solvable by policy - at least in the West.
Much more in the full report (pdf)