It’s been an interesting week. I was called last Thursday by Chris Hayes at MSNBC, asking if I could comment on an Economist piece that said the Joe Biden had ‘broken OPEC’ with his ‘trading’ of oil using the stockpiles of the Strategic Petroleum Reserve (SPR).
I told the producers that I certainly could comment, since I had myself written up the ‘trade’ more than a year and a half earlier in October of 2022, calling Joe Biden “the Greatest Oil Trader Ever”.
For those who don’t know the story, (or don’t care to watch the clip), gas prices had been raging higher in our post-pandemic recovery of 2022 – Here on the east coast, prices went above $5 a gallon, in California, some saw prices that briefly touched $10. Pent up demand for fuel for travel and re-igniting the economy after the lock downs was not being met by supply in the United States – US producers had shut down themselves during the pandemic and couldn’t immediately respond to the massive call for immediate supply. Prices soared, a major component of the runaway inflation we saw in 2022 and into early 2023.
Biden traveled to Saudi Arabia to ask OPEC for more supply – and was given raspberries instead by Crown Prince Mohammad bin Salman (MbS), despite the famous friendly ‘fist-bump’ photo that made all the wires (above). In this, it was hard for me to blame the Saudis, who depend upon oil revenues and had suffered themselves from the collapse of oil prices during the pandemic. They were excited to cash in on the sudden global supply shortage and concurrently rocketing prices, and hardly enthusiastic about increasing production.
So, Biden came home and hatched a plan to use the Strategic Petroleum Reserve more aggressively than any President ever before – as a “seller of last resort” to moderate prices at the pump.
Here are some facts that couldn’t be explored in that MSNBC spot:
1- the idea of using the SPR as a moderating force to prices was not new – but the fast scheduling and amount of oil released by the Biden administration definitely was – 180m barrels, or about 40% of the total held reserves.
2 – The mechanism of using sovereign stockpiles to ‘manipulate’ consumer prices is also not new – I had suggested using this mechanism myself to help augment the transition to renewables in my book “Turning Oil Green”, and other democratic countries, particularly in the hot arid areas of the Middle East and Africa had been using sovereign stockpiles of grain, for example, to cage prices for decades.
3 – There were a number of other factors that ‘helped’ Biden quash oil prices over the last nearly two years as well. Obviously the continued rise of interest rates by the Federal Reserve, targeting inflation broadly, was at least as much of a factor. Also, the winters of 2022 and 2023 were both exceedingly mild, putting far less demand pressure on oil and gas prices. To be fair, it wasn’t only the work of the SPR.
4 – Still, the effectiveness of this strategy caught every one (even me!) very much by surprise. I know (now) that it’s effectiveness was based in the intimidation it applied to other traders to abandon their own long positions despite the incredible fundamental bullishness of the markets at the time, and even JOIN WITH the US in selling oil. That’s traders for you – they don’t care one iota about anything other than making money. Let me tell you as a trader – If the US Treasury is telling me that they are committed to seeing oil prices go lower, then you can bet your ass I’m going to re-evaluate my long position, no matter how bullish the fundamentals appear to me.
It’s like watching a game of no limit Texas hold-em. Without knowing the cards each player holds, you can probably guess which player is going to ultimately win the game – it’s the one with the biggest stack of chips. He has the option of forcing every other player to put his life on the line on every hand. Miscalculate once, and the other guy is out of the game. But the ‘whale’ with the big stack can make mistake after mistake and stay in – until he has forced everyone else out.
That’s what it’s like sitting at the table opposite the United States of America – and the US Treasury.
Finally, a lot has been made of the money this trade made for the US government (about 200m X about $30 = about $5-6b). While that’s a fun side fact of the story, it’s hardly the main takeaway. $5 billion dollars isn’t going to fund much of the US government, although it’s a lot if you’re running the oil desk of Morgan Stanley, the world’s largest oil trader, in the early 2000’s. (their top year was a bit over a billion dollars, if I remember correctly).
The point is that Joe Biden called on an innovative strategy to help lower gas prices for consumers at a time of incredible stress – and did it. He also established a precedent to keep oil and gas prices in check for the future, perhaps insuring that oil prices won’t ever get back to the $125 barrel/$5 a gallon gas prices we had seen, off and on, since 2007. And he’s delivered more stability in the price structure of fossil fuels than the oil and gas markets have seen since both markets were deregulated in 2000.
Finally, he managed all this during a time of MidEast war, Iranian provocations and Russian aggression in Eastern Europe, normally any one of the three enough to hugely destabilize oil markets.
I’d say that’s the big takeaway – and quite an unprecedented success.
That’s all for this week
