The landscape of energy is moving really fast now – making strides in ways that are tough to see, but will have very long-lasting consequences for us, both as energy investors and just as energy consumers.
Take President Biden’s recent announcement of a planned 1 million barrel a day oil release from the US Strategic Petroleum Reserve.
It is a remarkable announcement, not because the SPR has never been used before – It’s been used several times through many administrations for various reasons, but never like this with the immense volume that is being planned to be released into the open market.
With about 600 million barrels in reserve, Biden can deliver on his promised six months of daily 1 million barrel releases. The obvious question is whether even this much oil can have a significant impact on the price of oil.
As with all threats and releases from the SPR throughout history, the fundamental impact is normally not very significant – remember, the total demand for oil is more than 100 million barrels a day, so 1% shouldn’t make much of an impact.
But it does. Similarly with all the threats and releases from the SPR, the fundamentals don’t tell the whole story. When the US government signals that it is looking to curb the fast upwards trends of oil and gas prices, it serves a strong negative signal to other market participants to be very very careful of initiating and holding speculative longs in the market. You can scare the bejeezus out of non-commercial speculators with SPR releases, enough to ease prices in futures markets quite a bit, and for at least a short period of time. That’s why this release is scheduled to last 6 months – Biden is hoping to keep the lid on prices for a much longer time than usual – hopefully for the time it likely will take to see a resolution of the crisis in Ukraine.
That is the real purpose of this release – it is not just about oil prices. It’s about supporting Europe in our economic war of sanctions with Russia. Much of Biden’s time in Europe was spent discussing with European allies how to supplant – and even completely ban – the supply of Russian oil and gas coming into Europe. Even though the idea of a full ban of Russian imports proved wildly impractical, Biden is trying his best to add US support for the concept as best he can – by releasing an extra 1m barrels into the global supply chain at this critical time. Any spare barrels that enter the markets will relieve some pressure on Europe, not just in price; but more importantly, in absolute supply.
And here’s where we get to the incredible possibilities that this move from the Biden administration brings energy for the future – and the oncoming transformations towards renewables.
One of the suggestions I made in my last book was about using the SPR in just this way – looking to create a far more stabilized oil marketplace that doesn’t haphazardly swing from $30 to $100 and beyond. I suggested using the SPR as a seller of last resort when prices became parabolically high like we’re witnessing today, but also as a buyer of last resort when prices go untenably low for oil producers to survive and maintain their production capabilities (like we saw in April 2020 when price went negative from the pandemic). Those hardships of low prices in the past two years are what is really hindering oil companies from responding to the pleas for more production today.
It has been the overriding thesis of my oil observations since the financial collapse of 2008 that the greatest hurdle for oil companies, oil consumers and the transition we must make towards renewables has been this insane volatility in oil prices.
And now it is my hope that this vast and unprecedented use of the SPR will be a first example of using the SPR as a stabilizing influence, and not just as an emergency tool used in extreme cases of war or natural disaster. It can be a mechanism at the constant ready to insure more stabilized oil economics, much as the Federal Reserve uses its ability to buy and sell bonds and other distressed assets during times of extreme capital markets volatility and stress.
The oil markets are in desperate need of this kind of Central governance, as the capital markets have enjoyed since, well, since the Fed first started buying and selling bonds to help finance the US government in WWI. It is this kind of intervention from the Federal Reserve which helped avoid a depression after the global meltdown in 2008 and the recent pandemic in 2020.
As we enter a very new age in Energy, where I believe the oil and gas markets will be bifurcated into two camps of ‘democratic’ oil vs. ‘autocratic’ oil, we will be looking more than ever to use every tool at our disposal to relieve as much of the incredible volatility in oil and gas prices that we have seen throughout times of energy stress, but particularly now during our sanctions efforts with Russia in support of Europe. These stresses are just beginning and, it seems to me, won’t end with the outcome in Ukraine. The US and Europe have collectively undertaken to make a quick path away from Russian oil and gas, which has financed the tanks that are currently rolling through Kiev. During their path away from Russian oil and gas and towards ‘democratic’ sources of oil and gas – and faster transitions towards solar and wind energy, the SPR can play a tremendous role in stabilizing oil and gas markets.
And that is going to be a critical factor in making those transitions faster and more efficient.
