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Poorly-Timed SPR Oil Release Could Cost U.S. Taxpayers $1.5 Billion
What Supply Emergency?
Unlike the two previous releases by the IEA, currently there's no similar crude supply shortage situation. Libya and Yemen are the two biggest concerns that the unrest could destabilize larger oil-producing countries in the region. However, these two nations produce less than 4% of the world's oil needs, and Saudi Arabia and others have boosted output to make up for much of the shortfall.
[...]
Other Possible Incentives
Others believe the move by the IEA and the U.S. is to
- Curb high consumer gasoline prices
- Send a message to market speculators
- Counter the failed production increase at OPEC meeting in Vienna on June 8
- Act as stimulus amid faltering global economy by lowering the commodity prices
[...]
Gas Price Intervention - Six Months Too Late
According to AAA, as of Sunday, June 26, the national average regular unleaded gas has dropped to $3.575 a gallon, or 10%, from almost $4 a gallon on May 6. Gasoline price is still up about 30% year-over-year. So if it is really about giving consumers a break at the pump, intervention should have been implemented at least six months ago to nip it at the start of the run-up
[...]
$800 Million Lost Revenue
Even if we put aside the supply, price and economic concerns discussed so far, from a pure financial management standpoint, the U.S. government also failed miserably as you should sell close to the top, instead of at a near bottom.
Reuters reported that the U.S. will offer all 30 million barrels in one bid sale with a base price of $112.78 a barrel, which is based on the price of the Louisiana Light Sweet crude (LLS) in the five days prior to Thursday, June 23. Companies must submit their bids by June 29, and may bid above or below the base price. The payment and delivery are to take place in August.
From this SPR sale time table, the final sale price of the 30 million barrels most likely will be far less than the $112.78 base, and could even be closer to $95, as August is almost the end of the summer driving season, and more market weakness will start manifesting two months into the end of QE2.
[...]
Sell You Lose, Buy You Lose
Since the SPR is sold essentially at the bottom of the market, it mostly likely will cost a lot more to replenish, based on current economic projection. The most ironic thing is that while trying to intervene the oil market, the U.S. government could end up driving prices further up than it would have been, and lose money both ways--on the sale and on the buy-back.
The entire sell-then-buy-back, process could very easily cost American taxpayers $1.5 billion, doubling the $800 million rough calculation I just did.
[...]
Too Little, Too Late & Too Desperate
All in all, this oil intervention of the Obama Administration came too little, too late. To put it in perspective, the IEA estimate global oil demand for 2011 is 89.3 million b/d, so the 60 million is not significant enough to sway the oil market supply and demand equation.
Furthermore, due to the poor timing, the damage to the global economy has already done impacting consumer and corporation spending pattern, whereas the cost inflation has already built into the goods and services supply chain, and manifesting in the latest U.S. consumer inflation numbers.
And frankly, if the U.S. and other IEA member countries have to resort to SPR as an economic stimulus, it is just a testament to the colossal failure of (1) global monetary and fiscal policies, (2) the global synchronized quantitative easing, and the dire desperation of politicians for re-election.
U.S. Fed Chairman Ben Bernanke has basically admitted the failure of QE2 to revive the economy. This SPR release acting as QE 2.5 is another waste of resource adding to the unmitigated disaster of the U.S. quantitative easing programs.
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About the Curator
Nidhi Singh
Nidhi Singh is a journalist for BestThinking.com and has studied at the University of North Carolina at Chapel Hill. Her interests lie in a
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