Rodney's Take 3-20-24 Oiling the Wheels of the Economy

Don't Forget Oil

Today, the investing world is focused on the Federal Reserve. The Federal Open Market Committee (FOMC) will finish up its monetary policy meeting, issue its rate decision, report on its summary economic projections, and hold a press conference. It is highly unlikely the FOMC will lower or raise overnight rates today, so all the worry is about what the Fed might do. Meanwhile, oil prices are moving higher, and the level of our Strategic Petroleum Reserve (SPR) remains almost half what it was in 2020, while our refining capacity is going the wrong direction. The U.S. is the largest oil producer on the planet, but we’re not saving more for global disruptions and we’re not expanding our ability to be energy independent. This seems like a bad idea.

For years, Congress under both parties has used the SPR like a savings account. Both Presidents Obama and Trump balanced their unrealistic budgets in part by selling oil from the SPR in the later years of their 10-year budget windows. President Biden supercharged it by selling almost 200 million barrels of oil to lower energy prices around the Russian saber rattling and eventual invasion of Ukraine. It worked, but it’s not over. The SPR held around 620 million barrels of oil in 2021 but the level had fallen to 346 million barrels in 2023, the lowest level in 40 years. It now holds a mere 361 million barrels. For Biden’s plan to work, he has to replace the oil he sold at $95 per barrel with cheaper oil. The administration plans to buy oil between $67 and $75 per barrel. They’ve bought a little, but what if they don’t get the chance again? The plan to sell high and buy low could backfire and end up costing us money.

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The U.S. has been the largest oil producer for the past few years, but that’s partly because OPEC+ has quotas in place for members. They hold back supply to keep prices high, and they’re just waiting for the Chinese economy to turn higher. At the same time, we’re regulating domestic refineries out of existence. All of them aren’t likely to close their doors, but we’re not building more of them. To get more gasoline, we export oil and then import gasoline. This is the opposite of what developed nations do. We’re supposed to import raw materials to manufacture value-added goods.

Mexico and several other nations are building refineries. It seems unlikely that their specifications will be close to ours.

As the Red Sea conflict heats up, the Ukrainians are taking aim at Russian oil production and storage and China eventually will turn the economic corner. While we have substantial production assets, we’re ignoring the low level in the SPR and turning a blind eye to our falling refining capacity. I’ve called for oil prices hovering around $100 per barrel, not $80. If we get a geopolitical jolt, the price could go much higher, and we will find ourselves in a mess of our own making.

Rodney

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