The U.S. Energy Information Administration announced that it is releasing 60 million barrel of stockpiled oil at a rate of 2 million barrels per day over the next month. 30 million barrels of this will come from the U.S. Strategic Petroleum Reserve. This release is reported to relieve tight market conditions caused by the cut-off of Libyan oil exports. Libya used to export about 1.6 million barrels per day, a rate that has been reduced to maybe a couple hundred-thousand barrels per day.
Oil supplies in the world are tight. Light sweet crude, the type Libya exports, is in very short supply. Excess production capacity in countries like Saudi Arabia is mostly heavy sour crude (thick and with lots of sulfur). Many refineries, especially in Europe and Asia, are not designed to refine this type of crude. The cut-off of Libyan oil makes it especially difficult for countries whose refineries can only refine light, sweet crude. Small changes in crude oil production, especially light sweet crude, can have a large impact on prices.
The shortage of light crude was partially responsible for the increase in gasoline and diesel prices in this country. Higher oil prices act like a tax on our economy. When people have to spend more to fill up their vehicles to commute to work, they have less money for discretionary spending.
The release of crude oil from strategic stockpiles will help the economy in the short run. But this is not a long run solution. The problem is that demand for oil is rising, particularly from emerging economies like China.
Oil production is not keeping pace so higher prices are the markets way of causing demand destruction. All of the people who want to buy oil based products like gasoline and diesel fuel can’t all be satisfied so the market tries to find a price point to balance supply and demand.
It is interesting that our current administration has been doing its best to impede oil production in this country. Off-shore drilling was suspended for over a year. Drilling permits are very slow in being awarded. This has probably resulted in a net reduction of 500,000 barrels per day of production that would otherwise be available.
Drilling in Alaska has been severely restricted. The main reason given was that the amount of oil that could potentially be produced would only amount to 6 months of U.S. consumption and would not affect the price of oil, therefore the environmental costs were not worth the oil produced.
Apparently drawing down 60 million barrels from the strategic stockpiles is warranted to lower prices, but opening up an estimated 30 billion barrels in Alaska would not lower prices!
Obviously this argument does not make a lot of sense.
China and other emerging markets are going to continue to claim a larger share of the world’s oil production. They are going to bid against the U.S. to get that oil. U.S. citizens are in a weak position to bid because of our weak currency due to our huge balance of trade deficit and huge government deficits.
Barack Obama and the Democrats have implemented their energy policy (do without). Our oil consumption is down due to the weak economy. The problem Obama has now is that he will need to improve the economy to create jobs, but an improving economy will increase the demand for oil, which will increase the price, which will slow the economy. Producing more oil is not an option before Obama has to stand for election due to the long lead times.
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