Tuesday, April 26, 2011

On Oil Subsidies, Politics, & The Strategic Oil Reserve

This is just a short post before my non-energy post later today on physics, philosophy & Richard Feynman.

I was in abject shock today after hearing that President Obama asked oil producers to increase output after, earlier this morning, he send a letter to Congress asking politicians to remove subsidies from the oil companies. Why would any oil producer increase output if they are going to see increased taxes (due to the removal of subsidies)? How does Obama expect to lower the price of oil if he is threatening to remove the subsidies? Does he expect everybody in the oil industry to starting working twice as hard, or for half the amount of pay? You can't threaten to use the Department of Justice to go after the oil companies, while expecting the oil companies to increase output. There is no conspiracy behind the high oil prices we are seeing today. The high oil prices are due to increased demand (as we are starting to pull out of the recession), due to decreased production in many countries (US gulf, Mexico's Cantarell oil field, North Sea, etc...), due to switching to more expensive summer-grade gasoline (with a higher boiling point), and due to fear of regime change in Saudi Arabia & other Middle Eastern countries.



I've said this before (as well as many other people), but it bears repeating:
The Obama Administration's Energy Policy is not grounded in reality. I partially blame this on Steve Chu, and I fear that he is giving physicists a bad rap in the energy field.

I'd also like to quickly address the issue of The Strategic Oil Reserve. Senator Chuck Schumer has been in the news again for wanting to draw down on the Strategic Oil Reserves. (Interestingly, these requests from Sen. Schumer also occurred periodically during the Clinton and Bush Administrations.) Sen. Shumer has been condemning "oil speculators" , but he has become an "oil speculator" by thinking that withdrawing oil from the SPR will lower oil prices.  (Check out the R-Squared Energy Blog at (Speculators & Strategic Oil Reserve)
So, Sen. Shumer is the pot calling the kettle black. He is no different than any other oil trader in the market. He is speculating on the direction of the market. However, I don't think that his speculation (that oil prices would decrease) would occur if the SPR were to be drawn down.

While I don't think that it was a good idea for President Bush to be filling the Strategic Oil Reserve, I don't think that releasing oil from the Strategic Reserve will help to lower the price of oil in the US. Here's the reason why:  The current price of oil already is adjusted (in the minds of the oil traders) with the assumption that the Reserve can be tapped into in the future. If we withdraw from the Reserve, I don't expect to see a significant change in the price of oil because, while there will temporarily be more oil on the market, the risk associated with oil will increase (due to less of a safety factor in reserves) and I expect the two trends to nearly cancel with each other.

There's also the fact that the Strategic Oil Reserve should only be used in drastic emergencies when people can't get gasoline, but this is not the point I want to make here. The point is that we should be looking for the secondary effects of any action. In this case, I think that drawing down the Strategic Reserve will end up increasing the price of oil futures enough that this will trickle down and cancel with any lowering in price due to increased oil on the market.

Let me know what you think.
--Eddie

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