Guest “Don’t underestimate Joe’s ability to [frack] things up” by David Middleton
Despite Biden’s best efforts to destroy the US oil & gas industry, his dysfunctional Department of Energy expects US domestic production “to reach a new record next year”…
This is beyond stupid…
The President’s announcement authorized DOE to release up to 180 million barrels from the SPR to serve as a wartime bridge as domestic production—which is expected to reach a new record next year—ramps back up. Already this historic release of SPR crude has provided approximately 165 million barrels of crude oil supply to the U.S. economy—resulting in certainty of supply for American businesses and consumers.
DOE plans to release up to 3 million barrels of sour crude oil and up to 12 million barrels of sweet crude oil for a total of 15 million barrels, with deliveries from December 1, 2022 to December 31, 2022 from the three SPR storage sites listed below.Department of Energy
The SPR was already at its lowest level since 1984, before the insane decision to drain 15 million additional barrels of crude oil from it. The 15 million bbl sale in December will put the SPR at less than 400 million bbl.
400 million barrels is equivalent to about 20 days of domestic petroleum consumption or about 130 days of net crude oil imports (imports – exports). The minimum allowable level under the International Energy Program agreement is 90 days worth of net imports.
Oddly enough, the Department of Energy hasn’t figured out how to incorporate Biden’s blunder into this explanation of the SPR’s purpose:
About the SPR
The Strategic Petroleum Reserve (SPR), the world’s largest supply of emergency crude oil was established primarily to reduce the impact of disruptions in supplies of petroleum products and to carry out obligations of the United States under the international energy program. The federally-owned oil stocks are stored in huge underground salt caverns at four sites along the coastline of the Gulf of Mexico. The sheer size of the SPR (authorized storage capacity of 714 million barrels) makes it a significant deterrent to oil import cutoffs and a key tool in foreign policy.
SPR oil is sold competitively when the President finds, pursuant to the conditions set forth in the Energy Policy and Conservation Act (EPCA), that a sale is required. Such conditions have only existed three times, most recently in June 2011 when the President directed a sale of 30 million barrels of crude oil to offset disruptions in supply due to unrest in Libya. During this severe energy supply interruption, the United States acted in coordination with its partners in the International Energy Agency (IEA). IEA countries released altogether a total of 60 million barrels of petroleum.
Additionally, the Secretary of Energy may authorize limited releases in the form of exchanges with entities that are not part of the Federal Government. This authority allows the SPR to negotiate exchanges where the SPR ultimately receives more oil than it released; thereby acquiring additional oil. With the exception of the 2000 Heating Oil Exchange, the SPR has entered into negotiated contracts at the request of private companies in order to address short-term, emergency supply disruptions to a refiner’s normal operations on several occasions.Department of Energy
The prescient geniuses at the Department of Energy have also developed a plan to refill the SPR at bargain basement prices…
The administration is also reinforcing its commitment to replenish the SPR to previous levels, with the goal of providing price certainty to taxpayers and a constructive buyback approach to bring certainty to industry. Today, DOE finalized a rule allowing fixed-price forward purchases of crude oil to replenish the SPR at lower prices than the barrels sold, while providing certainty to industry that will help encourage short-term production. Relative to conventional purchase contracts that expose producers to volatile crude prices, the fixed-price contracts can give producers the assurance to make investments today, knowing that the price they receive when they sell to the SPR will be locked in place, providing them with some protection against downward movements in the market.Department of Energy
Think about it. WTI is currently in the mid-$80’s per bbl and the Department of Energy wants to buy it for about $70/bbl.
The question is whether oil companies respond with increased output when the Dept of Energy also says it wants to buy the SPR oil back at $68-72/barrel.. a far lower price than today? Why invest in expensive new production if you’re being told prices are heading down, at the same time your costs are heading up?Brian Sullivan, LinkedIn
Setting aside the fact that they had filled the SPR at an average price of $29.70/bbl, who is going to lock in $68-72/bbl when they can sell it on the open market for $80-90/bbl? The EIA’s current STEO has WTI rising back into the $90’s during 2023. Biden & Co. are offering oil companies an “opportunity” to hedge future production at below-market prices… Unfrackingbelievable… Come on man!
With many, if not most, oil companies still taking losses due to over-hedging in 2020, most companies have reduced or suspended hedging. There’s a higher probability of Biden speaking in complete sentences than there is of refilling the SPR at ~$70/bbl in this environment.
What happens if (or when) oil prices collapse again? Is the US government actually going to honor long-term contracts to purchase crude oil at $70/bbl, when it’s trading in the $30’s to $40’s? Well Joe?