Crude Facts: A DealBreaker Thought Exercise

Posted by Equity Private, Apr 29, 2008, 4:42pm

Facts:

The Strategic Petroleum Reserve has a capacity of 727 million barrels.

As of April, 700 million barrels were held in the reserve. This should leave 27 million barrels left to fill.

Early this year the Bush Administration indicated it wants to have the reserve full by September. Assuming this is a 7 month effort, that's a rate of about 3.8 million barrels per month or around 128,000 per day. (This is "paid for" by producers who pay their taxes with oil rather than cash).

At best, just because of practical considerations, the reserve can pull out 4 million barrels per day.

Halting additions to the reserve and opening the spigot as wide as it goes will produce a "supply increase" of around 4.2 million barrels per day.

Daily consumption of oil in the United States: 20+ million barrels per day.

Short run demand elasticity of oil vis-a-vis gasoline price: 0.08 - 0.10.

Question 1: What are we to make of this assertion in the Wall Street Journal:

"We are in an extreme circumstance," the senators wrote. "I support an immediate halt in the deposits of domestic crude into the SPR as we enter the busiest driving season of the year."

The letter comes one day after a group of truckers and other citizens arrived at the Capitol asking the government to intervene as prices keep rising. With the average price of gasoline at the pump reaching a record $3.60 a gallon last week, according to government data, truckers and people who get to work by car are struggling.

Question 2: What is the likely impact on gasoline prices of: (a) A halt in additions to the SPR? (b) Opening the spigot as wide as it goes?

Extra credit question: Who finds these people who end up in Congress?

3Recommend this! 36Comments

Tags: Idiot Congresspersons, Oil

Comments

Posted by guest, Apr 29, 2008 4:49PM

1. No impact
2. No impact
3. No impact as people get the government they deserve

Posted by guest, Apr 29, 2008 4:53PM

1. nothing
2. nothing
3. evil plot by the canadians to embarass us

Posted by guest, Apr 29, 2008 5:00PM

As an aside, many people do not know the reason for generally higher prices of gasoline during the summer months.

This is a rather interesting link:

http://www.theoildrum.com/node/3845

Posted by guest, Apr 29, 2008 5:02PM

@5:00 Oh, so it has nothing to do with $120/barrel crude.

Posted by Anal_yst, Apr 29, 2008 5:26PM

1. Pro:Progress:Con:________?

2.
a) Naught
b) Zilch

EC. Tim Sykes' Website

Posted by diablo, Apr 29, 2008 5:40PM

Let me cut to the chase. This market is driven by speculators at this point. Speculators tend to be paranoid. Any action that involves the SPR will panic them, and that by itself will produce the desired effect.

Posted by guest, Apr 29, 2008 5:43PM

1. nothing
2. maybe a two day downtick on crude futures until some terrorist attack or strike drives it up again, and basically nothing on gasoline
3. Canadians who own all the oil, gas and water and are just screwing with us.

Posted by guest, Apr 29, 2008 6:19PM

If Pres. Bush 2nd would announce on any Saturday, like maybe during his radio address, that he is considering..(just considering) selling all or part of the SPR to refiners on a NET BACK basis ..(ie..You guys "borrow it, make refined products out of it, sell them and cut a profit for yourself, then pay us back later ....) the price of oil would drop 30% overnight as panicked speculators...refiners too...shouted "SOLD. DONE DEAL!!!!!!!!" as hard and fast as they could to anyone they could find by phone or email until their voices disintegrated and the fucking schedulers had to take over the selling from the traders the following Monday. Oh...I forgot...it has already happened once... around January 17, 1991. Those of you already long 10 or 12 VLCCs know the risk...I hope.

But....he won't do it.

Jimmy Crack Korn, East Texas Oil and Gas Trader

Posted by guest, Apr 29, 2008 6:23PM

1. Like the Geico caveman said, "Fuh..what??"

2. (a) nothing. (b) straight effing down.

3. lobbyists/PACs of course.

Posted by guest, Apr 29, 2008 6:29PM

here's the deal: our "leaders" are worried about a Shi'ite (a) Saudi Arabia, (b) Iraq and (3) Iran which is already Shi'ia.

In that situation, the Shi'ia would shut us off. that's a lot of oil.

It would take 6 to 12 months to militarily intervene in all three countries and restart the oil flows. Figure out how much oil we use each day and then figure out that's why the gov't wants a billion barrels in the SPR.

Posted by guest, Apr 29, 2008 6:50PM

As soon as we can get some new ball bearings for the valves, we will be closing the taps. The ones we got appear to have an offset center-of-gravity and don't roll nicely.

--Calgary Schmooze

Posted by guest, Apr 29, 2008 7:31PM

I heard President Bush yesterday on the radio, responding to a question from the news media re his policy of not selling existing fuel supplies in the SPR (which he refers to as the "SPRO") and not stopping the purchase of additional fuel for the SPR. I was astounded when the President offered valid economic reasons for not doing so, and actually made sense!

Posted by guest, Apr 29, 2008 7:47PM

I actually don't think that Bush is an idiot. His most successful public persona, on the other hand, was indeed a mindless bafoon. Still, looking at the current candidates me wants Bushie to run for another term...
And, by the way, the war on Iraq -- has anyone considered that this may have been THE most successful operation in modern colonial history? I mean you get teh best oil reserve in the world in exchange for some 300,000 military men a year guarding it.

Posted by Pro_Forma, Apr 29, 2008 7:53PM

A halt in adding to the reserve should make some difference, albeit a very minute and lagged one.

Effectively the SPR would be diverting (or selling off) those 128k barrels of oil per day. It wouldn't be long of course before producers make minor tweaks to reign in supply.

Posted by guest, Apr 29, 2008 7:58PM

High gas prices right now have as much to do with the shift to summer gasoline as they do high oil prices. Additionally, alkylate, an additive to reduce the vapor pressure of summer gasoline, is in short supply. An increase in crude would affect the refining margins of producers, so there would be a increase in supply, but I doubt there would be a material change in price.

Posted by guest, Apr 29, 2008 9:00PM

@ 7:47
the war on Iraq -- has anyone considered that this may have been THE most successful operation in modern colonial history? I mean you get teh best oil reserve in the world in exchange for some 300,000 military men a year guarding it.


agree with you 100% .... when do the rest of the American people get it ?!?!?!? .... a better buyout than any M&A deal since West germany merged with East Germany

Posted by guest, Apr 30, 2008 12:16AM

I don't agree that Iraq is the most successful operation in modern colonial history.

We've expended a lot of oil in the pursuit of our goals in Iraq. Hasn't Iraq oil production actually decreased due to the ongoing conflict?

The political ill-will we have sown there may impede our access to other sources of oil.

To continue to have access to Iraq's oil, we're going to have to maintain a fighting presence to prevent descent into civil war. That's a pretty big stretch for a volunteer army to maintain into the indefinite future -- and limits our strategy elsewhere in the world.

Such a strategy may also corrupt our national ideals in the long run. West Germany and East Germany saw themselves as one nation, which is why West Germany put up with the short-term burdens of pulling East Germany into the fold. By no means are we Iraqis, or Iraqis Americans.

Better we find a more reliable and less bloody way to meet our energy needs.

Posted by guest, Apr 30, 2008 12:19AM

Ok so everyone who took econ 101 is going to look at elasticities and say it has no effect and all that good garbage

But if you moved on to 202, you learned that elasticities aren't constant. We don't have enough data to properly analyze elasticities when gasoline takes up such a large proportion of average consumers expendable income.

Congressmen support whatever gets them votes, but the truth is that unless you assume constant elasticities, we don't know what effect opening the spigot would have

Posted by guest, Apr 30, 2008 6:47AM

you're wrong.

when elasticity is low, and increase in supply would have a larg(er) effect on price.

the question is the connection between crude oil prices and gasoline prices and is complicated by refining capacity.

Posted by guest, Apr 30, 2008 8:33AM

All things being equal, a fat woman's thong stretches more elastically than a skinny woman's thong.

Posted by guest, Apr 30, 2008 10:05AM

here's my unscientific input. Most people charge gasoline. And cary credit card balances. So the fact that the cost of a fillup went from $40 to $55 put only a psychologal dent in their disposable income. The real impact was that it caused an increase in household debt. Ditto for groceries - loaf of sliced bread for example used to be $1.99, now like $3.69. The debt increases related to these price increases are small. Which is why these price changes have little impact on demand (forgot if thats elastic or inelastic - me bad).

Posted by guest, Apr 30, 2008 10:09AM

@10.05 You're wrong and talking the crap mindless wall st liberals tout - that americans are stupid. The average american would kick your ass given the chance. now, go buy back your ars/mbs/cdos etc. chop, chop

Posted by guest, Apr 30, 2008 10:12AM

@10:09 Angry there.... But you never said where the flaw was in my argument. It has nothing to do with smart of stupid. Its behavioral finance 101. $15/week out of your pocket is not the same as a $15 increase in your household debt.

Posted by guest, Apr 30, 2008 10:29AM

@10.09--you assume people are stupid and dont get it. The 15 bucks needs to be paid, unless you believe locals yokels always get in debt and the go bankrupt.

Posted by guest, Apr 30, 2008 12:23PM

@10:05am. You make a point about gas & credit card charges.

I don't think people use credit cards as readily for food, unless they're short cash in the bank account. Food, as expensive as it is, racks up big charges pretty quick if you're using credit for groceries. There are limits to what you can put on cards. A day comes when the card will take no more.

Posted by guest, Apr 30, 2008 1:09PM

@12.23 - you have no idea how people live do you? I get miles buying stuff on credit cards and pay it off. So, win/win for most folks. I should kick your ass for wasting bandwidth

Posted by guest, Apr 30, 2008 1:23PM

@1:09 moron then you are not financing your food. you are using your credit card but not the credit component of it if you are paying it off every month it is just a transcation card, really no diff than your debit card aside from the book-keeping.

Posted by guest, Apr 30, 2008 1:26PM

@1.23--look douche head, its a big difference. In a debit card, I pay immediately, my way I get credit extended (money creation from my perspective) and pay it off (money expiration). so, its a huge difference.

I'm gonna open a can of whoop ass on you

Posted by guest, Apr 30, 2008 1:40PM

@1:09 Thanks for explaining how people live. Next thing I need you to do is unravel a mystery for me: if people live the way you think they do then why are interest bearing credit card balances through the roof?

Posted by guest, Apr 30, 2008 1:47PM

they're not

Posted by guest, Apr 30, 2008 1:51PM

@1:47 source please of that wisdom

Posted by guest, Apr 30, 2008 1:52PM

@1.51--through the roof is a question of definition

Posted by guest, Apr 30, 2008 1:54PM

1:47 Don't bother actually. From the latest Forbes:
Fitch said revolving consumer credit, which is mainly composed of credit card receivables, grew over 7.5 percent in 2007 and now stands at almost $952 billion, according to the Federal Reserve.

Credit card balances have been building as other sources of funding, such as home equity lines of credit and cash out mortgage refinancing

Posted by guest, Apr 30, 2008 2:03PM

Now be a good boy and go look up how much the other wise of the balance sheet grew. chop, chop

Posted by guest, Apr 30, 2008 2:26PM

@2:03 Are you Bush? Prosperity is just around the corner? What would have caused the other side to grow? Rising house prices? Rising equity markets? Oh I know, people are stockpiling gasoline and bread and financing it with their credit cards.

Posted by guest, Apr 30, 2008 2:30PM

@2.26 - you have to look at both sides of the balance sheet to draw any conclusions, or haven't you gotten to acc'tg 202 yet?

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