This is maybe the most disappointing post in Slow Boring history because the Biden Admin has a policy around refilling the SPR and... one would never know that from reading the post.


"The Administration is also moving forward with a proposal to allow fixed-price forward purchases of crude oil to replenish the SPR and 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. This proposal, if finalized as proposed, would encourage near-term production, promote market stability, and put the federal government in a better position to respond to future market volatility.

The Department of Energy is proposing rulemaking this week that would allow for these purchases. The new rule, if finalized as proposed, would enable the Department to enter into purchase contracts for future delivery at a fixed price. Under current regulations, the Department can enter into contracts for future delivery, but the price paid reflects prices at the time that product is delivered. By instead allowing for the price to be fixed at the time the transaction is executed between the parties, this regulatory change would provide greater certainty to producers regarding the revenues they could expect to generate if they produce more crude oil in the short-term, knowing that the Department has contracted to purchase these barrels at a previously agreed-upon price to replenish reserves.

Importantly, the actual delivery of these volumes back to the Reserve will not take place until well into the future, likely after FY 2023. This means that the repurchase agreements will encourage greater near-term investment in supply but will not raise demand for barrels now or in the near-future."

I guess Matt is assuming that his readership is aware of the Biden Admin repurchasing plan and this column is intended as a revision. But I think it is beneficial, when advocating a policy change, to say what the current policy is first.

BTW, as someone who wants to see Democrats win in November, I don't think the Biden Admin should be taking steps to drive oil prices UP before election day.

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I’d think their motivation in dithering is clear enough: they’re hesitant to put any upward pressure on oil prices before the midterms.

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I agree that the SPR should be refilled and assume it will happen after the midterms but I think the government creating a put wall at $80 is a bad idea and would encourage all sorts of frontrunning and games around that price. I think it would be much better to announce we are planning to refill the reserves over the next x number of months by purchasing roughly x number of barrels per month. I think that would create less shenanigans in the market and achieve the goal of refilling the reserve.

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"the climate left’s master narrative about politics requires them to be doing battle with nefarious special interests rather than with the public’s own unwillingness to make short-term economic sacrifices for the sake of the climate"

?Por que no los dos?

I'm a Democrat, and I recognize both that Big Oil spent years nefariously spreading disinformation about climate change *and* that the average American loves their big car and suburban house and does not want to curtail their fossil fuel consumption for the sake of climate change.

I also recognize that when it comes to politics (vs. policy), telling voters "Nefarious rich people have been lying to you" seems more likely to be a winning message than "You, my voters, are too shortsighted/stupid/selfish to make a short-term sacrifice for the greater good."

Alas for the CO2 tax! It would have been such a good solution, especially if coupled with building lots of nuclear power plants to provide baseload power.

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Using the SPR to deter and or to offset other actors' attempts to disrupt petroleum supply is a good idea and would be a good idea even with (indeed even better with) a tax on new CO2 emissions.

The "Left: really does need to tweak its "Master Narrative." The "nefarious special interests" that it needs to combat are those that lobby for/politically support anti growth, anti redistributionist positions. But the combat should not be against the bottom line of these firms per se.

The goal of policy is to bring firms' bottom lines into alignment with a growing, more equitable economy. And to the extent that some groups within the Left hold anti-growth positions, as Pogo said, "We have met the enemy and he is us."

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Is the SPR big enough to pull off any rep market stabilisation?

Some quick googling indicates the SPR holds about 700M barrels of oil. Daily global consumption is about 100M barrels. So we’re talking about 7 days of global oil consumption here.

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"Modern Democrats have an ambivalent relationship with the U.S. oil industry.

On the one hand, they acknowledge that high gasoline prices not only drive inflation but — very critically — drive perceptions of inflation.

But on the other hand, they see the oil industry fundamentally as their political enemy."

Everyone seems to have an ambivalent relationship with fossil fuels. It seems to manifest in things like price controls on energy in Europe (because there isn't enough, and it makes the price go to the moon), but simultaneously demanding that less energy is produced using dubious tools like ESG investing.

Regarding ESG, I want to know how much it reduces oil and gas production in western countries, and secondly to what extent authoritarian regimes fill the gap with their own production. I have a strong suspicion that it is either doing nothing, or even harms our own economies while doing nothing to reduce climate change.

It would be great if people understood the >>trade offs<< we have regarding energy production. We all know climate change is bad. But so is not having energy. So what are the options? Instead, we get this idiocy of people wanting cheap energy but without any of that nasty fracking or nuclear power.

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I love the basic idea, and have argued for similar policies in the past. However, Matt’s proposed $80/bbl price is bad politics because people still think the price of gas is too high.

Matt’s price is also bad economics.

The SPR will never be more than a few weeks of global production. It can smooth out but not eliminate price spikes. The greater the spread between the floor and ceiling prices, the greater the chance that the price floor and price ceiling actually hold.

The purchase price should be only slightly (maybe 5 to 10%) greater than the cost of production in the highest cost field America needs to maintain North American energy independence. I don’t have the data but an anecdote is useful. American production has increased in 2022 without a price floor. Further incentivize production with a price floor and it would explode. That would produce more oil than the government can store. However, abandoning the price floor would expose the wild catters to the uncertainties were are trying to hedge. Better to start off with a $55 price floor that would be easier to maintain. If time passes and we never get to that floor, it could be increased. There could even be a mechanical rule increasing the floor $0.75 each month there are no purchases but decreasing it $0.50 every month their are purchases, never to exceed $75/bbl.

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I don't have a complaint with the argument on the merits, but I don't quite understand the "oil is too important to leave to the market" framing, particularly in light of it pushing back against nationalization of the industry. The way I'm reading this article, the US government is merely being a participant in the market as a hedge against problems that can arise when gas prices go haywire in the minds of the public.

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The "America First (in oil production)" chart looks VERY wrong -- the US is pumping ~11 million barrels of oil a day, not 20 million.

Is that chart supposed to be "million of barrels of oil equivalent" ie including natural gas? [But then if so, Russia should be higher since it also produces natural gas]

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I really like this idea. I see a lot of commenters asking if the SPR is big enough to actually move global oil markets, but I think MY is calling to increase the size of the SPR not just fill it up. The actual facilities are 4 empty underground salt domes in LA and TX https://www.energy.gov/ceser/strategic-petroleum-reserve

I think it would be a good idea to increase the size of the SPR by an order of magnitude and I think we have enough empty salt domes to do it.

Should we pair this with legislation establishing a strategic grain and/or corn syrup reserve to combat instability in food prices and hedge against future drought?

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Matt, I know you love to beat up self-styled leftists when they advocate irrational and counterproductive policies. In fact, although I would happily characterize myself as a leftist, I often agree with your takes. However, this:" It’s because the climate left’s master narrative about politics requires them to be doing battle with nefarious special interests rather than with the public’s own unwillingness to make short-term economic sacrifices for the sake of the climate" is a bridge to e far for me. The fossil fuel Interests have used their immense political and economic power to stall action on climate. This is an extremely well documented fact. Since you are a reality based commentator, you ought to acknowledge this.

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I'm ambivalent in refilling the SPR now, but I am a strong proponent of making the SPR bigger and refilling it soonish.

And the main reason is the potential for a major war with China that will disrupt global trade to a far higher degree than what's happening with Russia. It would primarily be a naval war that occurs in some of the busiest and most important shipping lanes on the planet. The US needs the ability to ensure supply during that kind of disruption.

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"The idea was basically to prevent the country from running out of oil in a crisis. Of course, once it was created, the idea of using SPR releases to curb basic fluctuations in global oil prices was irresistible ...."

Then perhaps we should change the name to "Tactical Petroleum Reserve (TPR)."

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I'm never sure why any president gets flack when they chide companies to lower their prices. Inflation is keyed to consumer expectations, one of the reasons why gas prices 'go up like a rocket and down like a feather'. Saying "hmm, prices are still high even though demand is down and production is up, would be a shame if we had to start looking around for collusion" is absolutely an appropriate use of the bully pulpit.

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Great idea, but they will never do it. Too scared of the environmental wing. And it's important to also remember that they don't just hate oil companies because of global warming. They were trying to shut big oil down long before any of them had heard about greenhouse gasses.

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