Smoke and Mirrors

24 November 2021

 

Cogito Ergo Non Serviam

Oil from Strategic Reserve Won't Fix Gas Price Problems

 

The Biden administration is taking heat for the price of gasoline in the US. Gas is going for around $3.40 a gallon, which is 50% higher than a year ago. The increase is a function of economic recovery from the medically-induced commercial coma of last year. Rather than see it as a sign of progress, American drivers are whining about spending more now that there is somewhere to go. To address this, the White House has announced the release of 50 million barrels of oil from America's strategic reserve. The release will be coordinated with that of other nations. In the end, though, it is a temporary remedy at best, and it is probably too small to really affect the market.

The Washington Post reported, "Shortly after the U.S. announcement, India said it would release 5 million barrels from its strategic reserves. The British government confirmed it will release up to 1.5 million barrels from its stockpile. Japan and South Korea are also participating, and U.S. officials said it’s the biggest coordinated release from global strategic reserves." Analysts believe as much as 80 million barrels will hit the market next month.

The problem is that the market was hoping for 100 million barrels, and the market had priced that in already. This will disappoint, and prices may well rise in thin trading today. At best, the release will bring limited, short-lived relief. Goldman Sachs issued a research note yesterday titled "A Drop in the Ocean," that read in part, "On our pricing model, such a release would be worth less than $2 a barrel, significantly less than the $8 a barrel sell-off that occurred since late October."

Jeffrey Halley, senior market analyst at OANDA, told Reuters the move to tap storage was "a one-shot wonder and markets responded appropriately." The oil to be released represents 2.5 days of oil consumption for the US. That is hardly enough to move prices down and keep them there.

The key to the current price increase is OPEC+ (shorthand for OPEC and Russia). Reuters says, "OPEC+, which includes Russia, has resisted pressure for swifter hikes, sticking to its plan of gradually raising output by 400,000 barrels per day (bpd) each month since August, saying it worries a faster increase will lead to a glut in 2022.

"Yet OPEC+ can't even hit those goals. Production by OPEC+ was 700,000 bpd less than planned in both September and October, according to the International Energy Agency (IEA), raising the prospect of a tight market and high oil prices for longer."

A long-term solution lies in greater production capacity. However, that is not really in anyone's best interests. Environmental, social and governmental pressures are preventing the expansion of capacity. Banks are charging more for oil investment than for investment in green energy. Weaning the world off oil is not going to be painless, and higher prices are great incentive to substitute energy sources. Electric cars and trucks are more attractive when gas is $3.40 a gallon than when it is $2.10. At $5 a gallon, no one would question the economic wisdom of electric engines.

Yet democracies are supposed to be responsive to the demands of the electorate, even when those demands are ill-advised. American drivers want lower gas prices, and they want them now. The release of oil from the strategic reserves is a distraction at best and a gift to oil traders at worst. The whole world knows the price will dip only a little and only for a short time. It creates a buying opportunity and nothing else.

Being seen to act, even ineffectively, is more important than acting effectively in ways that cannot be seen. The Biden administration has little control over oil prices, so its actions are merely smoke and mirrors.

© Copyright 2021 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Ubuntu Linux.


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