This is the time to fill every strategic petroleum reserve in the world [0] to the top. And then double capacity and fill again. I'm sure there are some unintended consequences to doing this, anyone care to weigh in on pros and cons?
I’m not sure it would be practicing good social distancing to do a ton of construction work to double capacity, but yes, now would be a good time to fill existing reserves. Even oil tankers are getting reserved to store oil for later.
1. The price of oil won't necessarily go up from here. If it goes to $5/bbl, that will make governments look a bit stupid when they filled every storage space available at $15/bbl in the open market. One scenario where price doesn't increase would be if there is destruction of demand for commuting, as people realize they can work from home just fine in the long term. Another would be if auto prices increase due to automakers shutting down production lines. A third would be if vacation travelers are still spooked by residual outbreaks after travel restrictions are lifted. On the production side, we haven't seen the kind of capitulation that would be required to change the who's-who of the market; the fracking industry has yet to go over the precipice and there's no sign of renewed OPEC+ cooperation, so there's no organic reason yet for prices to increase.
2. Strategic reserves are generally in salt domes and other accessible underground formations, so there is actually a cost to filling them and also to pumping them empty. And you can't exactly "double capacity" without buying old wells from corporations. So what you are proposing would actually be a bailout for oil producers.
3. Petroleum reserves are not terribly useful to the economy, aside from two particular cases: war and natural disaster. In war, supply chains get interrupted and fuel demand goes up. In natural disasters, production and storage can be interrupted. Outside of those two things, the ability for frackers and other high-cost producers to come online and sell oil will naturally act as a resistance to skyrocketing fuel prices in times of supply shock.
4. This could be a massive moment for renewable energy; goods transportation costs are very low and many people will be seeking work once the pandemic abates, so the government could establish WPA-style programs to build wind farms, electrical grid improvements, and solar farms -- instead of spending that money on buying fossil fuels in order to pump them back into the ground. Instead of spending money in an attempt to cling to fossil fuels, we could use this moment as an opportunity to pivot.
5. The sooner the price of oil bottoms and a few overextended frackers devalue themselves by selling at a loss in order to generate cash flow, the more likely it is that Saudi Arabia will be satisfied with the results of its price war and will return to the negotiating table to re-establish output curbs. If you try to artificially boost the price by buying crude, all you will end up doing is delaying the natural solution. Low prices solve the problem of low prices, by pushing many market participants out of the supply side and allowing the survivors to push up prices again in an attempt to capture their larger market share at a price point with a favorable profit margin.
6. Strategic petroleum reserves aren't that big, and many of them were already quite full prior to the selloff. Even the US SPR had only enough capacity to absorb all Saudi production for less than two weeks.
Oil is dying. Fossil fuels are dying. Not in a hopeful environmental sense, but in an economic sense.
Electric cars are here, not in some far off hopeful environment with a few for rich people and nerds but here. Countries have mandated electric only in the near future. Coal mines are going broke. Renewable energy is often cheaper than fossil fuel energy.
This whole price crash is because two countries whose economies rely very heavily on oil profits can't really survive on $50 once they got used to $100 oil. Oil is $22 today because the monopoly was broken with North American oilsands kinds of production and enormous in ground capacity puts a price cap on oil.
We're watching two countries fight over the scraps of the oil market. Now this is on the scale of decades, but it's not just far off thinking but near-term risk of oil demand plummeting ... the current world economic shutdown is just a little extra nudge.
If we filled and doubled all of those strategic petroleum reserves, there would be serious doubt if they would ever – ever be used.
We are in the early stages of exponential growth of batteries replacing fossil fuels. After a generation, internal combustion will seem quaint.
So there are two general approaches people take to booms. Your income suddenly balloons and you have a choice.
Some people will expand their living standards to match their increased income. Others won't and will simply reap the extra rewards later. Some will know that winter is coming. Others just will know what they need and are not controlled by unconstrained wants.
Whenever the boom inevitable ends the first group is always the group that's in trouble.
In the 2000s in Australia was a massive construction boom. Tradesmen made huge money. Some bought expensive cars and houses and holidays. Post-GFC those days were over. Suddenly living on the big country estate was a problem because the $300/week you were spending on petrol was suddenly an issue.
Bringing this back to oil, on the one hand we have Norway who used their resource riches to create a sovereign wealth fund that last I heard was around $1T. On the other you have Venezuela, Russia and Saudi Arabia, where huge profits were pocketed by oligarchs, monarchs and kleptocrats.
At the same time, they needed the oil revenue to placate their people. Breakeven was once $10/barrel, then $20, then $30, then $50. Higher prices of course encouraged companies to invest in more expensive oil fields where the cost of extraction might well be $60+/barrel.
Saudi Arabia once tried to manipulate the market to wipe out the frackers (as the US became a huge net oil exporter). That was never going to work. They'd simply re-emerge when prices inevitable returned.
But now in a market where demand has fallen off a cliff, Saudi Arabia need to sell oil, pretty much at any price, to survive. A protracted price war does not bode well for either country but that's the predicament they're in.
This is another example of the delusion some people are in regarding this pandemic. When it's under control (or, more likely, run its course killing potentially millions), the world won't suddenly go back to the way it was. Capacity might be there but demand will take a long time to recover. You'll see this through the travel industry (particular cruises) and, with things like this, the oil and gas industry too. There's no containing it either.
Norway is an outlier in that the Government Pension Fund Global was founded explicitly to avoid rent-seeking behavior and corruption. Every other system to date was initially created to facilitate the opposite, US included. How many oil companies have a council of ethics dictating conflicts of interest for investment?
What is also terrible is that many multinational resource giants (not just oil) actively encourage corruption in countries without stable governance, further advancing their resource curse.
Spending more doesn’t necessarily mean that you expand your living standards. It can also mean that you finally have the money to put into some necessity that you put off, like fixing your roof.
You could sequester a tonne of CO2 for under $30 right now, although the lack of demand of oil may be better for the environment if it manages to long-term reduce production.
Thanks for this comment - it sent me down an interesting rabbit hole.
Sure enough - oil is approximately 85% carbon by mass. A barrel of oil weighs around 140kg, and so contains about 120kg of carbon. Carbon dioxide is 27% carbon by mass, so that barrel of oil, when oxidized, will end up as 440kg of CO2. So 1 tonne of CO2 is 2.3 barrels of oil, which would cost you.... under $30
For comparison, to sequester it after burning would cost probably closer to $100 [1]
I guess this is a long winded way to say that an ounce of prevention is worth a pound of cure.
I have actually contemplated a scenario where they pump oil into a hole in the ground for safe-keeping. It has several benefits:
* You're still producing oil meaning jobs are being maintained and money is flowing.
* You're potentially even refining some of it - at least certain types.
* You're safely storing it where it probably won't be stolen and is safely available if it ever increases in value.
* Storage is extremely low cost, potentially even free.
They could even pump it and then store it in the same hole it came from.
Okay that last part is obviously facetious, but there is something absurdly comical about two countries playing a game of chicken with their own petro-economies in the middle of a pandemic.
In a way they've always been subsidized because nobody prefers WCS. Measures like Keystone XL are just part of the gargantuan efforts that governments and companies make to make them viable.
whats worse is that oil sands have some of the highest production costs because you need to add steam and a bunch of other stuff to separate the other junk from the black gold
18.4 cents per gallon is a federal tax. States and local governments add on various sales and per gallon taxes that average close to $0.50 per gallon, though the sales tax portion will have driven some of that tax cost down. California adds 58.8 cents per gallon of taxes plus a 2.25% sales tax. Other states can be much lower but no matter where you are, there's a price floor due to taxes.
This happens often when there is a price shock--a kind of oil chicken where everyone keeps producing at a loss because they need to pay back the investments on the venture.
The article blames the corona lockdown, but other sources I’ve seen have the OPEC-Russia price war. Does anyone have some good analysis articles that break down the factors?
Demand shock is leading to a loss of places to put it, so the price must fall to a low enough price to make it profitable to pay increasing amounts to store it until its worth something.
The price war has depressed the price enough that to keep revenue up companies must continue to pump flat out.
Wikipedia actually has a reasonably good summary of the interplay between COVID-19 oil demand destruction and the recent Russia-OPEC / Russia-KSA oil market turning point.
Saudis and Russians have decided to increase their output of oil at the exact same time that most companies and businesses are choosing to reduce their oil consumption.
Additionally, there are not a lot of cheap ways to store oil long term, and it is difficult and costly to shut down production as well.
In Western Canada, pretty soon there will be negative oil prices, because the oil there is of a lower quality than others. Basically, they are paying for it to be trucked away so that it doesn't harm future production efforts.
As others have noted, it's both. However, to the point of how dramatic the price war impact has been....
The day the oil war began, Brent dropped from $50 to $31 in two trading days, the greatest rapid decline in many decades. The 24% drop at that time was the greatest one day decline since 1991.
seems like the week before corona forced wfh is when saudi arabia decided to increase oil production. one of the first stock market drops was in response to that if i remember correctly.
The producers should tell the financial community "We're destroying value by continuing to pump. We're essentially bankrupt at these prices." Then convert all their debt into equity at $0.000001 per share. Then go into care and maintenance and wait things out.
I'd expect oil to be negative in the next few weeks -- refineries are shutting down (and can't take the oil), most of the commercial storage facilities are full, and it's gone down far enough that it's uneconomical to pull it out of the ground (most of the articles that I've read put oil above $40.00 for most wells to turn a profit, and more than $3.50/mcf).
I was in Texas and it was under $2.00/gallon before everything started getting all locked-down due to COVID-19 -- my guess is that gas there will be in the $.80-$1.00 range in the near future. Between the decreased demand due to the "Stay-At-Home" order and the excess inventory (until all of the refineries shut down), we haven't seen the bottom yet.
At $7 a gallon for West Texas crude on the futures that translates to under 17 cents a gallon. Course that doesn't include refining and transportation costs plus federal and state taxes.
I don't know about your area but here in Michigan we're still at $2 a gallon. My friends in Austin, Texas say gas there is $1.35 a gallon. Is it fair to assume that middlemen are making obscene profits or am I wrong?
Refining adds about 30 cents per gallon flat, a bit more with additives, higher octane cracks, etc.
Here in Texas, it's 20 cents state tax + 18.4 cents federal tax
Distribution ranges from 20 cents/gallon to well over 2 dollars to far-flung places, this is the explanation behind most regional variance in price, they run pretty lean, maybe cost + 5-7%. (It's a volume play.)
So 17 cents crude + 30 cents refining + 38 cents taxes + say 25 cents distribution to Austin gets you to $1.10 and
the rest is margin, minus marketing and operating the retail location and you get net profit, typically in the 8-12 cent per gallon range.
When oil prices rise, the refiners usually extract most of the profit at the point of sale to distributors / retail.
Gasoline is profitable but distributed throughout the value chain.
While a prolonged lock down is definitely a possibility, it's also quite possible that the market will recover which should bring the price per barrel closer to normal range.
Edit: Really surprised by being downvoted for asking a question
The traditional way is to invest in large oil producers (XOM, BP, etc.), whose stocks are pretty strongly correlated with oil prices. But that's also placing a secondary bet that they won't go bankrupt before oil goes back up.
There are also ETFs that try to directly proxy oil prices by holding and continually rolling over near-dated oil futures. USO is the biggest of those. They have some technical issues tracking oil prices though, especially for long-term buy-and-hold strategies: https://www.investopedia.com/articles/markets/081116/uso-goo...
Try the ERX ETF when it drops back to recent lows $6-7, but only if you are very brave, have money you can afford to lose, but want a chance to 20x your stake:
Don’t touch any oil etf, especially any leveraged etf. Even an unelevered etf, like the USO, will destroy your investment. Every month the USO rolls the position from the month 1 contract to month 2. We are in a deeply contango market and will remain so for a while, so every month you’re going to lose 2-4$ per bbl. So even if oil appreciates several dollars, you still lose. Oil etf’s are toxic waste.
If this market crashes, why even go near oil and oil producers? Lots of good opportunities elsewhere. Still if you want to bet, watch out for CVX and XOM.
[+] [-] symplee|6 years ago|reply
https://en.wikipedia.org/wiki/Global_strategic_petroleum_res...
[+] [-] agrajag|6 years ago|reply
[+] [-] credit_guy|6 years ago|reply
[1] https://www.worldoil.com/news/2020/3/13/trump-to-fill-us-str...
[+] [-] siruncledrew|6 years ago|reply
Is there a point where not using the stored reserves by a certain year would make it unusable if bought today?
[+] [-] MR4D|6 years ago|reply
Not sure who took it out, but it seemed like a great opportunity.
[+] [-] x__x|6 years ago|reply
[+] [-] totalZero|6 years ago|reply
2. Strategic reserves are generally in salt domes and other accessible underground formations, so there is actually a cost to filling them and also to pumping them empty. And you can't exactly "double capacity" without buying old wells from corporations. So what you are proposing would actually be a bailout for oil producers.
3. Petroleum reserves are not terribly useful to the economy, aside from two particular cases: war and natural disaster. In war, supply chains get interrupted and fuel demand goes up. In natural disasters, production and storage can be interrupted. Outside of those two things, the ability for frackers and other high-cost producers to come online and sell oil will naturally act as a resistance to skyrocketing fuel prices in times of supply shock.
4. This could be a massive moment for renewable energy; goods transportation costs are very low and many people will be seeking work once the pandemic abates, so the government could establish WPA-style programs to build wind farms, electrical grid improvements, and solar farms -- instead of spending that money on buying fossil fuels in order to pump them back into the ground. Instead of spending money in an attempt to cling to fossil fuels, we could use this moment as an opportunity to pivot.
5. The sooner the price of oil bottoms and a few overextended frackers devalue themselves by selling at a loss in order to generate cash flow, the more likely it is that Saudi Arabia will be satisfied with the results of its price war and will return to the negotiating table to re-establish output curbs. If you try to artificially boost the price by buying crude, all you will end up doing is delaying the natural solution. Low prices solve the problem of low prices, by pushing many market participants out of the supply side and allowing the survivors to push up prices again in an attempt to capture their larger market share at a price point with a favorable profit margin.
6. Strategic petroleum reserves aren't that big, and many of them were already quite full prior to the selloff. Even the US SPR had only enough capacity to absorb all Saudi production for less than two weeks.
[+] [-] mushamalizat|6 years ago|reply
[+] [-] colechristensen|6 years ago|reply
Electric cars are here, not in some far off hopeful environment with a few for rich people and nerds but here. Countries have mandated electric only in the near future. Coal mines are going broke. Renewable energy is often cheaper than fossil fuel energy.
This whole price crash is because two countries whose economies rely very heavily on oil profits can't really survive on $50 once they got used to $100 oil. Oil is $22 today because the monopoly was broken with North American oilsands kinds of production and enormous in ground capacity puts a price cap on oil.
We're watching two countries fight over the scraps of the oil market. Now this is on the scale of decades, but it's not just far off thinking but near-term risk of oil demand plummeting ... the current world economic shutdown is just a little extra nudge.
If we filled and doubled all of those strategic petroleum reserves, there would be serious doubt if they would ever – ever be used.
We are in the early stages of exponential growth of batteries replacing fossil fuels. After a generation, internal combustion will seem quaint.
[+] [-] cletus|6 years ago|reply
Some people will expand their living standards to match their increased income. Others won't and will simply reap the extra rewards later. Some will know that winter is coming. Others just will know what they need and are not controlled by unconstrained wants.
Whenever the boom inevitable ends the first group is always the group that's in trouble.
In the 2000s in Australia was a massive construction boom. Tradesmen made huge money. Some bought expensive cars and houses and holidays. Post-GFC those days were over. Suddenly living on the big country estate was a problem because the $300/week you were spending on petrol was suddenly an issue.
Bringing this back to oil, on the one hand we have Norway who used their resource riches to create a sovereign wealth fund that last I heard was around $1T. On the other you have Venezuela, Russia and Saudi Arabia, where huge profits were pocketed by oligarchs, monarchs and kleptocrats.
At the same time, they needed the oil revenue to placate their people. Breakeven was once $10/barrel, then $20, then $30, then $50. Higher prices of course encouraged companies to invest in more expensive oil fields where the cost of extraction might well be $60+/barrel.
Saudi Arabia once tried to manipulate the market to wipe out the frackers (as the US became a huge net oil exporter). That was never going to work. They'd simply re-emerge when prices inevitable returned.
But now in a market where demand has fallen off a cliff, Saudi Arabia need to sell oil, pretty much at any price, to survive. A protracted price war does not bode well for either country but that's the predicament they're in.
This is another example of the delusion some people are in regarding this pandemic. When it's under control (or, more likely, run its course killing potentially millions), the world won't suddenly go back to the way it was. Capacity might be there but demand will take a long time to recover. You'll see this through the travel industry (particular cruises) and, with things like this, the oil and gas industry too. There's no containing it either.
[+] [-] wigl|6 years ago|reply
What is also terrible is that many multinational resource giants (not just oil) actively encourage corruption in countries without stable governance, further advancing their resource curse.
[+] [-] legulere|6 years ago|reply
[+] [-] mikhailfranco|6 years ago|reply
It was $ -0.47 on Monday:
https://www.zerohedge.com/s3/files/inline-images/mercuria%20...
[+] [-] ghouse|6 years ago|reply
[+] [-] tekstar|6 years ago|reply
[+] [-] heisenzombie|6 years ago|reply
Sure enough - oil is approximately 85% carbon by mass. A barrel of oil weighs around 140kg, and so contains about 120kg of carbon. Carbon dioxide is 27% carbon by mass, so that barrel of oil, when oxidized, will end up as 440kg of CO2. So 1 tonne of CO2 is 2.3 barrels of oil, which would cost you.... under $30
For comparison, to sequester it after burning would cost probably closer to $100 [1]
I guess this is a long winded way to say that an ounce of prevention is worth a pound of cure.
[1] https://energypost.eu/10-carbon-capture-methods-compared-cos...
[+] [-] tenpies|6 years ago|reply
* You're still producing oil meaning jobs are being maintained and money is flowing.
* You're potentially even refining some of it - at least certain types.
* You're safely storing it where it probably won't be stolen and is safely available if it ever increases in value.
* Storage is extremely low cost, potentially even free.
They could even pump it and then store it in the same hole it came from.
Okay that last part is obviously facetious, but there is something absurdly comical about two countries playing a game of chicken with their own petro-economies in the middle of a pandemic.
[+] [-] Waterluvian|6 years ago|reply
https://www.cbc.ca/news/business/oil-price-plummet-monday-1....
[+] [-] wigl|6 years ago|reply
[+] [-] wyxuan|6 years ago|reply
[+] [-] doggodad|6 years ago|reply
Seems like it could go lower, but maybe stations and refineries won't reduce prices to maintain profits.
[+] [-] Mountain_Skies|6 years ago|reply
[+] [-] stevenwoo|6 years ago|reply
[+] [-] wigl|6 years ago|reply
[+] [-] mxcrossb|6 years ago|reply
[+] [-] rmrm|6 years ago|reply
Demand shock is leading to a loss of places to put it, so the price must fall to a low enough price to make it profitable to pay increasing amounts to store it until its worth something.
The price war has depressed the price enough that to keep revenue up companies must continue to pump flat out.
Quite a nasty scenario to find oneself in.
[+] [-] Donald|6 years ago|reply
https://en.wikipedia.org/wiki/2020_Russia%E2%80%93Saudi_Arab...
[+] [-] quaquaqua1|6 years ago|reply
Saudis and Russians have decided to increase their output of oil at the exact same time that most companies and businesses are choosing to reduce their oil consumption.
Additionally, there are not a lot of cheap ways to store oil long term, and it is difficult and costly to shut down production as well.
In Western Canada, pretty soon there will be negative oil prices, because the oil there is of a lower quality than others. Basically, they are paying for it to be trucked away so that it doesn't harm future production efforts.
[+] [-] adventured|6 years ago|reply
The day the oil war began, Brent dropped from $50 to $31 in two trading days, the greatest rapid decline in many decades. The 24% drop at that time was the greatest one day decline since 1991.
[+] [-] rubyfan|6 years ago|reply
https://www.cnbc.com/2020/03/08/saudi-arabia-to-hike-oil-out...
[+] [-] rustyconover|6 years ago|reply
[+] [-] nroets|6 years ago|reply
Or is the financial system inefficient ?
[+] [-] imroot|6 years ago|reply
I was in Texas and it was under $2.00/gallon before everything started getting all locked-down due to COVID-19 -- my guess is that gas there will be in the $.80-$1.00 range in the near future. Between the decreased demand due to the "Stay-At-Home" order and the excess inventory (until all of the refineries shut down), we haven't seen the bottom yet.
[+] [-] sjs382|6 years ago|reply
[+] [-] unknown|6 years ago|reply
[deleted]
[+] [-] StillBored|6 years ago|reply
https://www.spr.doe.gov/dir/dir.html
[+] [-] TheGrassyKnoll|6 years ago|reply
[+] [-] rmason|6 years ago|reply
I don't know about your area but here in Michigan we're still at $2 a gallon. My friends in Austin, Texas say gas there is $1.35 a gallon. Is it fair to assume that middlemen are making obscene profits or am I wrong?
[+] [-] kthejoker2|6 years ago|reply
Here in Texas, it's 20 cents state tax + 18.4 cents federal tax
Distribution ranges from 20 cents/gallon to well over 2 dollars to far-flung places, this is the explanation behind most regional variance in price, they run pretty lean, maybe cost + 5-7%. (It's a volume play.)
So 17 cents crude + 30 cents refining + 38 cents taxes + say 25 cents distribution to Austin gets you to $1.10 and the rest is margin, minus marketing and operating the retail location and you get net profit, typically in the 8-12 cent per gallon range.
When oil prices rise, the refiners usually extract most of the profit at the point of sale to distributors / retail.
Gasoline is profitable but distributed throughout the value chain.
[+] [-] johnbrodie|6 years ago|reply
[+] [-] tomerico|6 years ago|reply
While a prolonged lock down is definitely a possibility, it's also quite possible that the market will recover which should bring the price per barrel closer to normal range.
Edit: Really surprised by being downvoted for asking a question
[+] [-] _delirium|6 years ago|reply
There are also ETFs that try to directly proxy oil prices by holding and continually rolling over near-dated oil futures. USO is the biggest of those. They have some technical issues tracking oil prices though, especially for long-term buy-and-hold strategies: https://www.investopedia.com/articles/markets/081116/uso-goo...
[+] [-] mikhailfranco|6 years ago|reply
https://finance.yahoo.com/quote/ERX
[+] [-] audiometry|6 years ago|reply
[+] [-] raincom|6 years ago|reply
[+] [-] antoineMoPa|6 years ago|reply
[+] [-] mister_hn|6 years ago|reply
I'm waiting for the Oil to go again up and then the gas station prices further up
[+] [-] ww520|6 years ago|reply
With central banks around the world pumping money into the economies, can the extra money counteract the downward pressure?
It's a weird time to see glut of oil and glut of money flowing around.
[+] [-] ornornor|6 years ago|reply