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.
This is an interesting point. Given that the need isn't about oil security anymore, why is a physical reserve even needed?
If the goal is less about managing the spot price than it is about managing future supply, wouldn't it be more efficient to use a portfolio of futures contracts the way the Fed manages its balance sheet?
That’s essentially what I came here to ask. Your reference to the Fed also makes me wonder if the Fed itself could do that? oil prices are a driver of inflation, so oil price stabilization is compatible with their mission.
Ironically, it’s essentially the opposite of the push to use the Fed to deprive fossil fuel companies of investment.
The Fed should not be used as a tool to affect policy outside of its bailiwick. It already has enough on its plate and should be laser focused on inflation and employment. Oil price stabilization may be compatible with the Fed's mission but is not remotely necessary. This logic could support the Fed intervening in a wide variety of activities that it has no business doing.
The Fed trades bonds for demand deposits, so it doesn’t need physical storage when it holds bonds. But if you are trading oil futures, you need a place to put the oil when the price doesn’t move the way you expect.
I'd assume this approach would involve managing a portfolio comprised of both securities and cash (or available credit). They'd never need to take delivery of anything.
Contracts either get rolled or they get cashed out by covering the amount out-of-the-money.
Just like with maintaining physical oil inventories, there's no guarantee the program will be cash neutral.
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.
"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.
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."
It means that we want oil firms to produce as much oil at as low cost as they can consistent with the demand for oil being governed by a tax on net CO2 emissions. We want the electricity producing company to chose between solar-natural gas, wind-natural gas, only wind, only solar, geothermal, nuclear technologies so as to maximize profits when the effects of the tax on net Co2 emissions is part of the the profit and loss calculation. We want call centers to maximize the number of spam calls taking into account the ability of the recipient to chard back the annoyance of the call. Or as Adam Smith said, "It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest."
I'm not against subsidies for zero CO2 missing technologies provided they are structured to subsidize the energy produced (CO2 not emitted) and the amount of the subsidy is in relation to the harm done by the CO2. That is the subsidy is a work around to the the actual tax on the CO2 emissions that we ought actually to have. And although _I_ am willing to pay the taxes to finance the subsidy, that is the standard objection to net CO2 emissions taxation, so what's the larger point? What I AM against is the idea that we can actually deal with ACC without a tax on net CO2 emissions. In the meantime well calibrated subsidies are better than nothing, so I am not against them.
"Equitable economy" I'm not looking up the exact context, but I mean that I want the growth that I favor to be widely shared and on many margins I'm in favor of sacrificing some growth for downward redistribution of income.
“I'm not against subsidies for zero CO2 missing technologies provided they are structured to subsidize the energy produced (CO2 not emitted) and the amount of the subsidy is in relation to the harm done by the CO2”
I wonder: is there any such subsidy in place?
“I'm in favor of sacrificing some growth for downward redistribution of income”
Ah, so welfare is a bigger concern than climate change. Got it.
All the subsidies that I'm aware of are pretty inefficient and so will have far higher fiscal costs that better subsidies that achieve the same amount of reduction in net CO2 emissions. Do you mean, if pushed to the wall am I against even inefficient subsidies, well we'd have to look carefully case by case but sure some would fail the "better than nothing?" test, like to consumers for purchase of EV. I'll leave it up to you whether to characterize my position as "against subsidies."
Climate change is ABOUT welfare. Or do you mean is there a tradeoff between dealing with climate change and downward redistribution of income? In perfect theory yes; an unconstrained optimum has to be better than a constrained one. But I sure cannot see any practical way in which they are in conflict. A tax on net emissions may be regressive, but the revenues could be used to reduce other regressive taxes (like the wage tax, for example) or could be rebated at a flat amount per person, or even more progressively.
Somehow I suspect (I hope) that my choice of word is tripping up your understanding of my opinions.
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.
7 days of total consumption means that you could supplement global consumption or production by nearly 2% for a full year. I don’t know how often price spikes or drops are caused by 2% mismatches between supply and demand, but it doesn’t sound implausible that they can be.
Biden authorized a 1 mbd drawdown of the SPR, so about 1% of global demand. He could have done more -- max drawdown capacity is 4.4 mbd.
But the idea that this pretty small tail can wag a pretty big dog seems questionable to me. The SPR was created to guard against import disruptions. That's no longer a big concern, but it still should be focused on helping make up for major supply disruptions and not try to manage global prices to help the current party in the White House.
"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.
Some folks are doing research and trying to quantify this now, but it has been somewhat hard to cabin effects to just “the energy sector”. For example you can partly code many of the super-majors shift to include renewable projects and not open entirely new fields to ESG, or you could say it is in response to long term value calculations.
Anecdotally, some non-major mining companies claim to have seen some cost of capital shifts, as do some refiner and petrochemical folks. It’s very hard to tease out though. Rather than raising the cost of capital for a lot of companies, I’d argue on the margin that ESG investors have mainly driven:
1) increased costs at larger firms (that they might’ve done anyway) thru diversity initiatives, more advertising how nice they are, tacking on some climate initiatives, etc
2) lower cost of capital at newer entrants how can claim (right or wrong) to be ESG friendly. Arguably this decreases market efficiency and therefore growth, but maybe you argue that the market underprices these things anyway and it’s really “helping”
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.
Just as a heads up - exactly what the highest marginal price project is constantly shifting because it is sensitive to costs of materials but also because oil prices (more accurately, projected prices and costs) change where folks are willing to go drill - on top of the investor fear about losses again.
The problem with the $55 floor is that it’s not high enough (imho) to hit the inducement of supply you are looking for. Especially with drillers really unsure about steel cost and supply, among other things, that have seen major inflationary pressure. Some worry this will continue to get worse in industry because some decent quantity of said supplies (look up OCTG) is either imported or globally priced… between global demand AND European manufacturers shutting lines due to energy issues AND info pacific producers now paying higher energy prices as well, there is a lot of cost pressure on drilling inputs that creates worries for planning new drilling in the mid-term for the shale players.
Kinda guessing, and others will have real empirical models to at least have a better argument, but my guess is $75-$80 isn’t far from where they’d land.
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.
I sincerely hope that Matt does NOT think that nationalization of oil companies is just another one to those cool , technocratic ideas that's a little too cool for politicians circa 2021. This is not to say that nationalization would not lead to a fall In output. Venezuela showed us how that works, but who want to deal with the refugees from SD? :)
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]
I got the data from the EIA[1], specifically I used the first row under "Production" for each country which is "Total petroleum and other liquids (Mb/d)." I believe the subcategory NGPL refers to natural gas, but you can see that the data says that as of May 2022 (most recent date) the US is pumping ~20M barrels/day compared to ~10.4M b/d for Russia and ~11.9M b/d for Saudi Arabia.
If I got something wrong please let me know and I will fix the chart.
I'm 80% confident that the chart should be remade using the "Crude oil including lease condensate (Mb/d)" row instead of the "Total petroleum and other liquids (Mb/d)" row, because the "Crude oil including lease condensate (Mb/d)" row seems to line up with the EIA's own graph on another page:
I don't work in the fossil fuel industry so I can't tell you *why* everyone seems to be using "Crude oil including lease condensate (Mb/d)" instead of "Total petroleum and other liquids (Mb/d)", only that it appears to be the case that they are.
Further research would be needed to work out what "NGPL (Mb/d)" are and why the US has so much more of it than Saudi Arabia or Russia. EIA defines it as:
We have more ngpl because it often “shows up” in higher quantities in wells producing lots of natural gas depending on the field, particularly if fracked (or alongside a mostly oil well as associated gas) - and we produce lots of that, so this is a product of the natural gas processing plant when you separate out the methane/nat gas. Plus we make sure we capture it for both regulatory and economic reasons and have the petrochemical facilities to use it so there is incentive there.
Russias number is surprisingly low given their NG production even though they are producing more out of traditional gas fields than the US is, which makes me believe they are probably venting and flaring a lot of it at their processing plants…especially since they already vent/flare/leak at about the highest rates in the world.
Basically as far as I can tell the US gets more liquids from natural gas than Russia or Saudi Arabia does, so reporting crude oil + NGPL shows a very different figure from just reporting NGPL.
Huh, you're right in that basically every source I checked shows crude production at ~11 million barrels per day, but my (admittedly quick and perhaps incorrect) attempt at converting our natural gas production from cubic feet to OBEs looked like it would add another 21 million barrels, so that doesn't seem to be the source of the disconnect. Hopefully Milan can chime in and clarify sources!
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?
I know some people who would have really appreciated if the govt owned a strategic reserve of orange concentrate to balance out any wild swings in orange concentrate futures
Apparently the Canadian province of Quebec actually maintains a reserve of maple syrup. And the Chinese gov. stockpiles pork. This is all from a New York Times article "policy wank" linked to in his comment.
I wouldn’t call eight “a few,” but whatever. We need the defense budget, we need the SPR somewhat less, and we need student loan forgiveness not at all.
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.
Sure, but the leftists feel that this means they shouldn't have to engage with public sentiment, and they thus want to pretend that they don't have to.
Which is, obviously, stupid.
As far as I can tell at least a small chunk of the farthest left folks look on the GOP's current electoral insanity with envy as opposed to fear. They just wish it was *them* in the drivers' seat.
And the crazies on the far-right look at the far-left with envy. That's how we got the recent NatCon conference. The NatCons love government power and coercion as much as the Left does.
People are happy with action on climate - as long as it does not result in additional cost or inconvenience to themselves. Do you think people are willing to make 'short-term economic sacrifices for the sake of the climate'? People weren't happy with stupid expensive fuel for their cars, and it wasn't because they were brainwashed by fossil fuel interests.
What do you think we should do on climate? Do you have a plan that is both effective and one the public can tolerate?
The Netherlands did “car-free Sundays” to reduce oil demand back during the 1970s oil crisis. It seems to have been popular and led to an excellent network of cycling infrastructure. In the US just over half of all trips are below 3 miles. Why do we completely discount the possibility of people *not* using their car for every single thing?
I haven't looked, but I'd be willing to wager money that the rate of household car ownership in 1970s Netherlands was at least 25% lower than the US today and probably much lower than that.
You can't change the built environment by declaring car-free Sundays. It's not a question of preferences, it's a question of what has been built and what is legal to build.
The Dutch built environment is generally older and even when it isn't it is generally built according to the pre-automotive development pattern, which is denser. Even if you build it badly it can be easily retrofitted to be bikeable. But you can't do that in most of US suburbia.
You can’t change the built environment that way but you *can* make it safe to ride a bike on streets where it otherwise isn’t. I can think of several streets near me like that.
Don't get me wrong, I think suburbs are an environmental disaster and I love densely populated, walkable neighborhoods. But implementing car-free Sundays will do nothing to change the fact that if you live in a typical American suburb, the nearest grocery store is 5 min away by car and 40 min away on foot. Not everyone is in good enough physical shape to ride a bicycle, plus it's unpleasant when it rains/snows/you have to go up steep hills.
To your second question, likely pretty important - but we're not in a complete embargo situation like the Dutch were in the 70s, so it's not like we'd have to be quite as forceful as they were. I'm just disappointed that there doesn't seem to be any appetite for policy to encourage mode shift in the many cases where that is very feasible, like temporary partial street restrictions and bike lanes to make personal transportation safer and more effective. I can think of one or two streets near me where even some temporary protected bike lanes would dramatically increase how far I could safely travel by bike.
I'd be willing to try if I felt reasonably confident that even a 1 mile trip to the grocery store in good weather isn't taking my life into my own hands.
The fact that a 1 mile trip to the grocery store would require taking your life into your own hands in so many places in this country is shameful. We need to do better than this when building our infrastructure, and the solutions are well known.
"The fossil fuel Interests have used their immense political and economic power to stall action on climate. This is an extremely well documented fact."
And yet, it is still not the case that "the climate left [needs] to be doing battle with nefarious special interests rather than with the public's own [selfishness]". Just because group A works to oppose policy B does not imply that the optimal way to effect B is to marginalize A.
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.
"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)."
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.
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.
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.
https://www.whitehouse.gov/briefing-room/statements-releases/2022/07/26/fact-sheet-department-of-energy-releases-new-notice-of-sale-as-gasoline-prices-continue-to-fall/
"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.
This is an interesting point. Given that the need isn't about oil security anymore, why is a physical reserve even needed?
If the goal is less about managing the spot price than it is about managing future supply, wouldn't it be more efficient to use a portfolio of futures contracts the way the Fed manages its balance sheet?
That’s essentially what I came here to ask. Your reference to the Fed also makes me wonder if the Fed itself could do that? oil prices are a driver of inflation, so oil price stabilization is compatible with their mission.
Ironically, it’s essentially the opposite of the push to use the Fed to deprive fossil fuel companies of investment.
The Fed should not be used as a tool to affect policy outside of its bailiwick. It already has enough on its plate and should be laser focused on inflation and employment. Oil price stabilization may be compatible with the Fed's mission but is not remotely necessary. This logic could support the Fed intervening in a wide variety of activities that it has no business doing.
And the inevitable end-result would be to (further) politicize the Fed, which would compromise its primary mission.
Although, compared to almost every other American institution the Fed is really not that politicized.
There is still a need for a physical reserve
The Fed trades bonds for demand deposits, so it doesn’t need physical storage when it holds bonds. But if you are trading oil futures, you need a place to put the oil when the price doesn’t move the way you expect.
I'd assume this approach would involve managing a portfolio comprised of both securities and cash (or available credit). They'd never need to take delivery of anything.
Contracts either get rolled or they get cashed out by covering the amount out-of-the-money.
Just like with maintaining physical oil inventories, there's no guarantee the program will be cash neutral.
I’d think their motivation in dithering is clear enough: they’re hesitant to put any upward pressure on oil prices before the midterms.
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.
Agreed. Diamond hands meets galaxy brain is a bad idea. In the parlance of our times.
The parlance of the Young and Very Online, at least.
I doubt that even 20% of the US populace would have a clue what that means. =)
*Next time on The Young & The Very Online….*
"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.
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."
“The goal of policy is to bring firms' bottom lines into alignment with a growing, more equitable economy”
What does that mean?
Shape their incentives via policy so that they align with progressive's goals.
No clue how to achieve that, though.
Agree. There are different degrees of difficulty along different dimensions. Net CO2 emissions is pretty easy.
It means that we want oil firms to produce as much oil at as low cost as they can consistent with the demand for oil being governed by a tax on net CO2 emissions. We want the electricity producing company to chose between solar-natural gas, wind-natural gas, only wind, only solar, geothermal, nuclear technologies so as to maximize profits when the effects of the tax on net Co2 emissions is part of the the profit and loss calculation. We want call centers to maximize the number of spam calls taking into account the ability of the recipient to chard back the annoyance of the call. Or as Adam Smith said, "It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own self-interest."
Presumably you are against subsidies for renewable energy.
What did you mean by “equitable economy”?
I'm not against subsidies for zero CO2 missing technologies provided they are structured to subsidize the energy produced (CO2 not emitted) and the amount of the subsidy is in relation to the harm done by the CO2. That is the subsidy is a work around to the the actual tax on the CO2 emissions that we ought actually to have. And although _I_ am willing to pay the taxes to finance the subsidy, that is the standard objection to net CO2 emissions taxation, so what's the larger point? What I AM against is the idea that we can actually deal with ACC without a tax on net CO2 emissions. In the meantime well calibrated subsidies are better than nothing, so I am not against them.
"Equitable economy" I'm not looking up the exact context, but I mean that I want the growth that I favor to be widely shared and on many margins I'm in favor of sacrificing some growth for downward redistribution of income.
“I'm not against subsidies for zero CO2 missing technologies provided they are structured to subsidize the energy produced (CO2 not emitted) and the amount of the subsidy is in relation to the harm done by the CO2”
I wonder: is there any such subsidy in place?
“I'm in favor of sacrificing some growth for downward redistribution of income”
Ah, so welfare is a bigger concern than climate change. Got it.
All the subsidies that I'm aware of are pretty inefficient and so will have far higher fiscal costs that better subsidies that achieve the same amount of reduction in net CO2 emissions. Do you mean, if pushed to the wall am I against even inefficient subsidies, well we'd have to look carefully case by case but sure some would fail the "better than nothing?" test, like to consumers for purchase of EV. I'll leave it up to you whether to characterize my position as "against subsidies."
Climate change is ABOUT welfare. Or do you mean is there a tradeoff between dealing with climate change and downward redistribution of income? In perfect theory yes; an unconstrained optimum has to be better than a constrained one. But I sure cannot see any practical way in which they are in conflict. A tax on net emissions may be regressive, but the revenues could be used to reduce other regressive taxes (like the wage tax, for example) or could be rebated at a flat amount per person, or even more progressively.
Somehow I suspect (I hope) that my choice of word is tripping up your understanding of my opinions.
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.
7 days of total consumption means that you could supplement global consumption or production by nearly 2% for a full year. I don’t know how often price spikes or drops are caused by 2% mismatches between supply and demand, but it doesn’t sound implausible that they can be.
Biden authorized a 1 mbd drawdown of the SPR, so about 1% of global demand. He could have done more -- max drawdown capacity is 4.4 mbd.
But the idea that this pretty small tail can wag a pretty big dog seems questionable to me. The SPR was created to guard against import disruptions. That's no longer a big concern, but it still should be focused on helping make up for major supply disruptions and not try to manage global prices to help the current party in the White House.
I think the idea is partly that we should expand the SPR.
"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.
ESG is generating higher profits for investment banks, because they charge higher fees to ESG investors without having to do much more work.
Some folks are doing research and trying to quantify this now, but it has been somewhat hard to cabin effects to just “the energy sector”. For example you can partly code many of the super-majors shift to include renewable projects and not open entirely new fields to ESG, or you could say it is in response to long term value calculations.
Anecdotally, some non-major mining companies claim to have seen some cost of capital shifts, as do some refiner and petrochemical folks. It’s very hard to tease out though. Rather than raising the cost of capital for a lot of companies, I’d argue on the margin that ESG investors have mainly driven:
1) increased costs at larger firms (that they might’ve done anyway) thru diversity initiatives, more advertising how nice they are, tacking on some climate initiatives, etc
2) lower cost of capital at newer entrants how can claim (right or wrong) to be ESG friendly. Arguably this decreases market efficiency and therefore growth, but maybe you argue that the market underprices these things anyway and it’s really “helping”
"It would be great if people understood the >>trade offs<< we have regarding energy production."
Quoted for truth.
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.
Just as a heads up - exactly what the highest marginal price project is constantly shifting because it is sensitive to costs of materials but also because oil prices (more accurately, projected prices and costs) change where folks are willing to go drill - on top of the investor fear about losses again.
The problem with the $55 floor is that it’s not high enough (imho) to hit the inducement of supply you are looking for. Especially with drillers really unsure about steel cost and supply, among other things, that have seen major inflationary pressure. Some worry this will continue to get worse in industry because some decent quantity of said supplies (look up OCTG) is either imported or globally priced… between global demand AND European manufacturers shutting lines due to energy issues AND info pacific producers now paying higher energy prices as well, there is a lot of cost pressure on drilling inputs that creates worries for planning new drilling in the mid-term for the shale players.
Kinda guessing, and others will have real empirical models to at least have a better argument, but my guess is $75-$80 isn’t far from where they’d land.
$55 might be too low. It might be sufficient to spur production. That’s why I think the floor should start low and rise slowly if no purchases occur.
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.
I think Matt's point is that nationalization is politically unfeasible, not that nationalization is bad on the merits.
I sincerely hope that Matt does NOT think that nationalization of oil companies is just another one to those cool , technocratic ideas that's a little too cool for politicians circa 2021. This is not to say that nationalization would not lead to a fall In output. Venezuela showed us how that works, but who want to deal with the refugees from SD? :)
That may be a sop to "Progressives."
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]
I got the data from the EIA[1], specifically I used the first row under "Production" for each country which is "Total petroleum and other liquids (Mb/d)." I believe the subcategory NGPL refers to natural gas, but you can see that the data says that as of May 2022 (most recent date) the US is pumping ~20M barrels/day compared to ~10.4M b/d for Russia and ~11.9M b/d for Saudi Arabia.
If I got something wrong please let me know and I will fix the chart.
[1] https://www.eia.gov/international/data/world/petroleum-and-other-liquids/monthly-petroleum-and-other-liquids-production?pd=5&p=0000000000000000000000000000000000vg&u=0&f=M&v=line&a=-&i=none&vo=value&t=C&g=none&l=249-000000000000000000000000000000000000000500000002&s=94694400000&e=1651363200000&
Yeah the chart is way off - you want crude oil, either weekly or monthly ( you labeled as monthly, avg mbd so go with this one)
https://www.eia.gov/dnav/pet/pet_crd_crpdn_adc_mbblpd_m.htm
I'm 80% confident that the chart should be remade using the "Crude oil including lease condensate (Mb/d)" row instead of the "Total petroleum and other liquids (Mb/d)" row, because the "Crude oil including lease condensate (Mb/d)" row seems to line up with the EIA's own graph on another page:
https://www.eia.gov/energyexplained/oil-and-petroleum-products/where-our-oil-comes-from.php
And also the ~11 million barrels of oil per day figure for the US is something that pops up in a lot of other sources:
https://www.macrotrends.net/2562/us-crude-oil-production-historical-chart
https://www.reuters.com/markets/commodities/us-oil-output-rises-17-june-highest-since-april-2020-eia-2022-08-31/
https://www.forbes.com/sites/daneberhart/2022/09/19/why-us-shale-producers-arent-riding-to-the-rescue-despite-tight-oil-supplies/?sh=6d5f6a236456
I don't work in the fossil fuel industry so I can't tell you *why* everyone seems to be using "Crude oil including lease condensate (Mb/d)" instead of "Total petroleum and other liquids (Mb/d)", only that it appears to be the case that they are.
Further research would be needed to work out what "NGPL (Mb/d)" are and why the US has so much more of it than Saudi Arabia or Russia. EIA defines it as:
https://www.eia.gov/tools/glossary/index.php?id=Natural%20gas%20plant%20liquids
But that doesn't tell me enough for me to understand those charts.
We have more ngpl because it often “shows up” in higher quantities in wells producing lots of natural gas depending on the field, particularly if fracked (or alongside a mostly oil well as associated gas) - and we produce lots of that, so this is a product of the natural gas processing plant when you separate out the methane/nat gas. Plus we make sure we capture it for both regulatory and economic reasons and have the petrochemical facilities to use it so there is incentive there.
Russias number is surprisingly low given their NG production even though they are producing more out of traditional gas fields than the US is, which makes me believe they are probably venting and flaring a lot of it at their processing plants…especially since they already vent/flare/leak at about the highest rates in the world.
Thanks for the info!
Alternatively, the chart could be left as is but relabelled "Total petroleum and other liquids production, as reported by the EIA"
I'm no expert, but the EIA also has this: https://www.eia.gov/energyexplained/oil-and-petroleum-products/where-our-oil-comes-from.php
Still shows the US as the highest producer, but basically tied with Russia and Saudi Arabia.
That is a big difference. Wonder if the chart that Milan was using includes Ethanol production.
The gap isn't due to (corn) ethanol production, but rather mostly due to "NGPL":
https://www.eia.gov/international/data/world/petroleum-and-other-liquids/monthly-petroleum-and-other-liquids-production?pd=5&p=0000000000000000000000000000000000vg&u=0&f=M&v=line&a=-&i=none&vo=value&t=C&g=none&l=249-000000000000000000000000000000000000000500000002&s=94694400000&e=1651363200000&
Which are "Natural Gas Plant Liquids":
https://www.eia.gov/tools/glossary/index.php?id=Natural%20gas%20plant%20liquids
Basically as far as I can tell the US gets more liquids from natural gas than Russia or Saudi Arabia does, so reporting crude oil + NGPL shows a very different figure from just reporting NGPL.
Thanks! Somehow I couldn’t find a page like this on the EIA site when I poked around, this is exactly what I was looking for.
Huh, you're right in that basically every source I checked shows crude production at ~11 million barrels per day, but my (admittedly quick and perhaps incorrect) attempt at converting our natural gas production from cubic feet to OBEs looked like it would add another 21 million barrels, so that doesn't seem to be the source of the disconnect. Hopefully Milan can chime in and clarify sources!
The link from Milan seems to show that the disconnect is due to NGPL which are "Natural Gas Plant Liquids"
https://www.eia.gov/tools/glossary/index.php?id=Natural%20gas%20plant%20liquids
I'm quite fuzzy on why we have so much more of them than Russia or Saudi Arabia though.
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?
Do we need our own maple syrup reserve, or can we depend on Canada to share?
I know some people who would have really appreciated if the govt owned a strategic reserve of orange concentrate to balance out any wild swings in orange concentrate futures
They should have lobbied Senator Al Franken for this when they had their chance. https://www.youtube.com/watch?v=x07BKBdjIak
They will share, or they will be forced to share!!!
Buy American! Can't beat Vermont Maple Syrup.
Yes you can.
Canada imports maple sap from the US, by the way. Congress could put an and to this tomorrow if they wanted to.
Apparently the Canadian province of Quebec actually maintains a reserve of maple syrup. And the Chinese gov. stockpiles pork. This is all from a New York Times article "policy wank" linked to in his comment.
Yes, thanks, that is why I asked if Canada would share.
An order of magnitude increase would be about a 7 billion barrel reserve. Filling that at a fixed $80 price would cost over half a trillion dollars.
Yieks! maybe just double it then. Thanks for checking my arithmetic.
So about the same as student loan cancellation?
Or a few months of the DoD budget.
I wouldn’t call eight “a few,” but whatever. We need the defense budget, we need the SPR somewhat less, and we need student loan forgiveness not at all.
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.
Sure, but the leftists feel that this means they shouldn't have to engage with public sentiment, and they thus want to pretend that they don't have to.
Which is, obviously, stupid.
As far as I can tell at least a small chunk of the farthest left folks look on the GOP's current electoral insanity with envy as opposed to fear. They just wish it was *them* in the drivers' seat.
And the crazies on the far-right look at the far-left with envy. That's how we got the recent NatCon conference. The NatCons love government power and coercion as much as the Left does.
People are happy with action on climate - as long as it does not result in additional cost or inconvenience to themselves. Do you think people are willing to make 'short-term economic sacrifices for the sake of the climate'? People weren't happy with stupid expensive fuel for their cars, and it wasn't because they were brainwashed by fossil fuel interests.
What do you think we should do on climate? Do you have a plan that is both effective and one the public can tolerate?
The Netherlands did “car-free Sundays” to reduce oil demand back during the 1970s oil crisis. It seems to have been popular and led to an excellent network of cycling infrastructure. In the US just over half of all trips are below 3 miles. Why do we completely discount the possibility of people *not* using their car for every single thing?
I haven't looked, but I'd be willing to wager money that the rate of household car ownership in 1970s Netherlands was at least 25% lower than the US today and probably much lower than that.
Regrettably, a lot of suburbia is designed to not be as easy or safe to commute by anything other than a car, even in the <3 mile range.
That is exactly the sort of thing that would change during something like a car-free Sunday!
You can't change the built environment by declaring car-free Sundays. It's not a question of preferences, it's a question of what has been built and what is legal to build.
The Dutch built environment is generally older and even when it isn't it is generally built according to the pre-automotive development pattern, which is denser. Even if you build it badly it can be easily retrofitted to be bikeable. But you can't do that in most of US suburbia.
You can’t change the built environment that way but you *can* make it safe to ride a bike on streets where it otherwise isn’t. I can think of several streets near me like that.
But why would most people support that?
They generally like their cars.
No, it wouldn't.
Don't get me wrong, I think suburbs are an environmental disaster and I love densely populated, walkable neighborhoods. But implementing car-free Sundays will do nothing to change the fact that if you live in a typical American suburb, the nearest grocery store is 5 min away by car and 40 min away on foot. Not everyone is in good enough physical shape to ride a bicycle, plus it's unpleasant when it rains/snows/you have to go up steep hills.
And what % are 10+ miles, and how important are those trips?
To your first question, 20%: https://www.energy.gov/eere/vehicles/articles/fotw-1230-march-21-2022-more-half-all-daily-trips-were-less-three-miles-2021
To your second question, likely pretty important - but we're not in a complete embargo situation like the Dutch were in the 70s, so it's not like we'd have to be quite as forceful as they were. I'm just disappointed that there doesn't seem to be any appetite for policy to encourage mode shift in the many cases where that is very feasible, like temporary partial street restrictions and bike lanes to make personal transportation safer and more effective. I can think of one or two streets near me where even some temporary protected bike lanes would dramatically increase how far I could safely travel by bike.
I'd be willing to try if I felt reasonably confident that even a 1 mile trip to the grocery store in good weather isn't taking my life into my own hands.
The fact that a 1 mile trip to the grocery store would require taking your life into your own hands in so many places in this country is shameful. We need to do better than this when building our infrastructure, and the solutions are well known.
"The fossil fuel Interests have used their immense political and economic power to stall action on climate. This is an extremely well documented fact."
And yet, it is still not the case that "the climate left [needs] to be doing battle with nefarious special interests rather than with the public's own [selfishness]". Just because group A works to oppose policy B does not imply that the optimal way to effect B is to marginalize A.
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.
"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)."
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.
“I'm never sure why any president gets flack when they chide companies to lower their prices”
Maybe because it’s none of their business and they speak ignorantly about it?
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.