Joe Biden’s SPR Caper—A Triple Bogey

Back in the day we were a strong proponent of an aggressive build-up of the Strategic Petroleum Reserve (SPR). That’s because in the late 1970s the winning argument in Washington for all manner of insidious energy policy interventions—-synfuels subsidies, oil and gas price and allocation controls, mandatory energy efficiency standards, electrical grid mandates to buy wind/solar etc—was that a major supply interruption from the Persian Gulf would send the US economy reeling and seriously threaten national security.

So all of these interventions were essentially aimed at energy autarky-—using high cost stuff made at home including ethanol from corn, petroleum products distilled from coal, energy efficient washer-dryers and much more. Of course, all of these interventions over-rode the free market’s search for least cost supplies, including imported petroleum, but that was waved aside in the name of “energy security”.

We differed profoundly. Our contention was that efficient energy supplies and energy security were wholly different matters, and that the latter did not require sacrificing domestic prosperity and rising living standards on the alter of high cost energy autarky (independence).

Instead, the right strategy was two-fold:

First, let the free market find the least-cost solution to the nation’s energy requirements, regardless of where those supplies were sourced;
Second, treat “energy security” like all matters of national security—as a fiscal investment. In this case that meant buying crude oil to store in vast salt caverns, where it would be available for market-calming release in the event of a major worldwide crude oil supply outage.

As it happened, our argument prevailed. During the early years of the Reagan Administration we dismantled nearly the entire apparatus of Jimmy Carter’s energy autarky schemes—including most alternative energy subsidies, price and allocation controls and wackadoo measures like energy efficiency standards for toasters.

At the same time, we did aggressively build the SPR from less than 200 million barrels in 1980 to 600 million barrels by the end of the Gipper’s presidency, and from there to a peak of about 725 million barrels around 2012.

To be sure, by the latter date the US did reach something close to energy self-sufficiency on a net basis. But that was the work of Mr. Market pursuing least cost solutions, not Washington energy bureaucrats picking winners and losers.

Accordingly, in one-fell swoop over a 30-year period, the nation’s energy security was immensely enhanced; Big Government via energy autarky schemes was decisively defeated; and a largely market-based energy economy propelled a sustained period of prosperity.

Nevertheless, there was always a residual argument against SPR. Namely, that one day some craven politicians on Capitol Hill or in the White House would turn the SPR into a political football, releasing supplies for the sole purpose of bringing down domestic gas prices in the run-up to an election, even if there were no major global supply outage.

We acknowledged the argument, but the risk seemed worthwhile if it enabled the dismantlement of Washington’s energy autarky schemes.

Yet never did we dream that one day the White House would be occupied by political hacks as craven and mendacious as the crew which feeds words into Joe Biden’s teleprompter. Yet at the end of March Sleepy Joe announced a staggering 180 million barrel release to be staged at a rate of 1 mb/d during the period running right up to the November election.

For perspective, Biden’s SPR release was fully 10X to 90X larger than had occurred in earlier periods when there was a genuine emergency, such as the first Gulf War and the temporary shutdown of Gulf Coast production in the aftermath of Hurricane Katrina.

What this means is that by election day the 568 million barrel cushion extant on March 31st will have diminished to just 390 million barrels—the lowest quantity since 1986 when the program was in its original ramp-up mode.

If we were a partisan hothead like Sean Hannity we would be tempted to say that the Biden crew has treasonously converted a national security asset into a campaign war chest. But actually we can make do with “rank stupidity” because this foolish release of SPR reserves was never going to materially bring down pump prices in the US anyway.

For crying out loud. The crude oil and petroleum markets are some of the most completely interconnected and thoroughly arbitraged markets on the planet. Under normal circumstances, once you adjust for quality grades and transportation distance/cost, the same price per petroleum BTU prevails all around the world.

Needless to say, 1.0 mb/d is a lot of crude, but it’s also just 1% of the 100 million barrel per day global market. And it’s also, much less than the 2-3 mb/d of Russian crude and products that Washington’s senseless Sanctions War has backed out of the global supply system.

So not surprisingly, even with the recent swoon in commodities, the pump price at $4.77 per gallon is still up by 15% from where it was when the Biden SPR release plan was announced at the end of March. That is to say, Team Biden came up with a double bogey: The squandering of a national security asset and no cigar at the gas pumps.

US Retail Gasoline Price, April-July 2022

Actually, we should make that a triple bogey. Courtesy of Reuters we now know that more than 5 million barrels of the SPR release were exported to Europe and Asia last month alone.

For instance, Philips 66, the fourth-largest US oil refiner, shipped about 470,000 barrels of sour crude from the Big Hill SPR storage site in Texas to Trieste, Italy, according to data from US Customs. Trieste is home to a pipeline that sends oil to refineries in Central Europe.

Likewise, Atlantic Trading and Marketing (ATMI), a branch of France’s leading oil company TotalEnergies, exported 2 cargoes of 560,000 barrels each, which cargoes were headed to Netherlands and a Reliance refinery in India. And a third cargo was heading for, wait for it, China!

Of course, there really is nothing surprising about these revelations. As we said, the global petroleum markets are nearly perfectly liquid and arbitraged—-so there is nothing particularly nefarious per se about the fact that these SPR cargoes got caromed off into the world market.

What we are dealing with, instead, is rank stupidity. If these exported SPR cargoes had been legally constrained to domestic refinery use, that mandate would have merely backed out an equivalent amount of currently produced domestic crude, which would have ended up in Italy, Netherlands, India, China, etc. That is, it wouldn’t have made one dime of difference at the gas pump.

Needless to say, this is all petroleum economics 101, about which Team Biden is clueless as we are reminded nearly daily.

Even Jeff Bezos felt compelled to call foul when Sleepy Joe tweeted this weekend that the tens of thousands of independent businessmen who run the nation’s gas stations, and who make larger margins on Snickers bars and 16 OZ Cokes than on gasoline, should cut prices in order to help him enforce the so-called “liberal international order” in Ukraine. But going after mom and pop gas stores merely demonstrates just how out to lunch the handlers of our senile presidential puppet truly are.

And this gets us to the larger issue. The Biden Administration has not merely politicized the SPR, but has effectively weaponized the entire energy market in pursuit of its wrong-headed intervention in the intramural dispute between Russia and its former territories and vassal.

Obviously, the energy sanctions have backfired, even as they created a two-tier global oil market: That is, a discount counter for Russia’s friends like India, Brazil, South Africa and China, and premium prices for main street America and Washington’s pitiful European allies. In consequence, Russia is making more petroleum revenue than ever before owing to far higher prices on only modestly reduced volumes, while Washington and its allies pay the freight.

Nor is the petroleum market the end of the ricochet. Owing to vast under-investment in fossil fuels in recent years, driven by Green Energy mandates and misguided incentives, an energy-starved world is turning back to coal as natural-gas and oil shortages accelerate.

That’s right. Coal was left for dead several years ago, a sacrificial offering to the anti-CO2 fanaticism of the world Climate Change zealots. But prices today are at all-time highs, where spot coal prices at Australia’s Newcastle port, a key supplier to Asia, topped $400 a ton for the first time last month.

As the Wall Street Journal recently summarized it,

The push is being led by Europe, which is boosting coal purchases to ensure it can keep power flowing to homes and factories after Russia cut gas supplies to the continent. Germany, which has promised to eliminate coal as a power source by 2030, is among the nations now importing more.  In fact, Green Party leader and Economy Minister, Robert Habeck, called the increased  reliance on coal bitter but necessary.

In addition to Germany, Italy, France, the U.K., the Netherlands and Austria have now said they are preparing to restart coal-fired power plants, boost their production or keep them running longer than planned.

Parts of the US are boosting use of coal power, as high demand for electricity amid unusually hot temperatures pushes regional power grids to the brink of blackouts this summer.

US Producer Price Index: Coal Mining data by YChartsand is on track to hit record highs this year, according to forecasts by the IEA.

As a result of these large perturbations in the oil and gas markets caused by Green Energy Policies and the Sanctions War, coal demand is hitting record levels. But notwithstanding all of the arm-waving of the Climate Howlers and misguided efforts in the west to banish coal, the numbers speak louder than words.

To wit, between 2015 and 2021 the entire world except the US and Europe increased its consumption of coal, even as the latter sharply curtailed coal use in favor of natural gas and grid-unfriendly solar and wind.

2021 Coal Consumption/% Change From 2015:

China: 4.13 billion tons, up 9%;
India: 1.06 billion tons, up 20%;
Rest-of-world: 1.78 billion tons, up 8%;
USA: 508 million tons, down 29%;
Europe: 435 million tons, down 36%;
World Total: 7.9 billion tons, up 2.2%;

But now these trends are reversing in both the US and Europe. Bloomberg recently pointed out that coal imports have poured into the Antwerp-Rotterdam-Amsterdam region — a huge transport hub for energy and commodities. During the first half of this year imports surged 35% to 26.9 million tons compared with the same period last year.

Needless to say, just as in the case of petroleum and natural gas, Putin is laughing all the way to the bank. Russia, which is the world’s fourth-largest coal exporter behind Australia, Indonesia and South Africa, has seen its seaborne exports of coal increase since the Feb. 24 invasion.

There has been some switching of buyers but the loss of some markets in Europe and Japan has been more than offset by increased buying, especially by India and Turkey.

Russia exported 16.45 million tonnes of coal by sea in June and 16.56 million tonnes in May compared to 13.43 million tonnes in December, 12.28 million in January and 13.08 million in February.

In particular, China bought 4.72 million tonnes of seaborne coal from Russia in June, and 4.57 million in May, according to Kpler, up from 3.12 million in January and 2.61 million in February.

India, which has been ramping up coal imports amid a domestic shortage, has substantially boosted purchases from Russia, with Kpler data showing 1.16 million tonnes arrived in June and 836,072 tonnes in May, up from 678,051 tonnes in January and 501,115 in February.

In short, in every energy market, the Sanctions War has backfired. In addition to $5 gas at the pump, US consumers will be paying sharply higher utility bills as even coal prices soar to unprecedented levels.

Yes, from SPR to coal, the Joe Biden Administration is clueless. And it’s only going to get worse—far worse—from here.


Reprinted with permission from David Stockman’s Contra Corner.

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