The Biden Administration is treading on dangerous ground as it continues to deplete the Strategic Petroleum Reserve (SPR) to levels not seen in decades, as geopolitical tensions flare and as global crude prices remain high.
The chart above shows that the Strategic Petroleum Reserve has declined to levels not seen since the early 1980s.
The SPR is a tool used to alleviate the market impacts of both domestic and international disruptions, caused by among other things: weather, natural disasters, labor strikes, technical failures/accidents, or geopolitical conflicts.
Source: U.S. Department of Energy. Office of Cybersecurity, Energy Security, and Emergency Response. This image is in the public domain.
Since the start of 2023, the SPR has drained by another 6.5% or 24 million barrels.
Source: U.S. Department of Energy. Office of Cybersecurity, Energy Security, and Emergency Response. This image is in the public domain.
The SPR is comprised of 60 caverns, each one of which can fit the Willis Tower, one of the world's tallest skyscrapers.
Source: U.S. Department of Energy. Office of Cybersecurity, Energy Security, and Emergency Response. This image is in the public domain.
The decision to withdraw crude oil from the SPR in the event of an energy emergency is made by the President under the authority of the Energy Policy and Conservation Act (EPCA) and done through competitive sale.
Perhaps what is so remarkable is that over the past 2 years, the Biden Administration has released nearly 300 million barrels of crude oil from the SPR, concurrent with the Federal Reserve undertaking the most extreme pace of monetary tightening on record in its attempt to maintain price stability, and yet crude oil prices have barely subsided.
In fact, in recent months, crude oil prices have surged, as shown in the chart below.
The global crude benchmark,
UKOIL
has been on an upward trajectory in recent months, soaring nearly 30% since June.
On the higher timeframe chart, we can see that crude oil prices show strong upward momentum. As soon as the Federal Reserve pivots back to monetary easing crude oil prices will likely resurge.
A log-linear regression channel is applied to the quarterly (3-month) chart of
OXY
Petroleum, showing the current bull rally could just be the first leg of a multi-year upward trend. The red line in the middle represents the mean price and each gray line represents one standard deviation from the mean.
Perhaps the tendency of crude oil to rise in price over the coming years is why the Oracle of Omaha, Warren Buffet, began purchasing a large number of
OXY
Petroleum shares in 2022, accumulating more than a 25% ownership stake in the company by mid-2023.
Some financial experts are sounding the alarm about the SPR depletion. The founder of The Bear Traps Report, Larry McDonald, has indicated that the drastic decline in U.S. oil stockpiles, a critical asset in times of conflict, undermines America's energy security.
McDonald is warning that diminishing domestic oil reserves heighten America's dependence on imports, potentially exposing the nation to severe supply disruptions and extreme price volatility in the international oil market. Each time the price of crude oil subsides, petroleum exporting countries, including Saudi Arabia and Russia, cut production to keep prices higher for longer.
To some, it may seem that these production cuts are a gray zone tactic meant to deplete an adversary of its strategic oil reserves before engaging them in a conflict.
There is also collateral damage occurring to the U.S. dollar. The petrodollar system, which emerged in the 1970s when the U.S. abandoned the last vestiges of its gold standard, was a series of agreements between the U.S. and petroleum exporting countries to use the U.S. dollar for cross-border oil transactions. Since almost every country needed to import or export some amount of petroleum, the petrodollar system was a means of ensuring a perpetual global demand for U.S. dollars despite the currency not being redeemable at the Federal Reserve for anything of value.
As crude oil prices continue to surge, despite the Federal Reserve tightening monetary conditions at the fastest pace on record, a crisis is unfolding for developing countries that lack access to dollars. These countries are on the precipice of hyperinflation. In essence, by tightening the supply of dollars the Federal Reserve is exporting inflation abroad, especially to those that lack easy access to dollars. Consequently, countries at the periphery of the dollar access hierarchy are being incentivized, now more than ever, to turn to alternative currencies, thereby accelerating de-dollarization.
As oil prices continue their relentless march upward, the scenario continues to exacerbate inflationary pressures in the U.S., and even more so, abroad. Higher prices could compel the Federal Reserve to maintain higher interest rates for much longer than anticipated, even in the face of deteriorating economic conditions and rising unemployment, resulting in stagflation. Exacerbating the situation further are global climate change policy objectives, which act as a disincentive for countries to increase domestic oil production.
If a major geopolitical conflict occurs when petroleum reserves are depleted and production is constrained, the outcome could result in severe stagflation, as prices spiral higher even though economic growth stagnates in the face of a fragmenting world.
* * *
Important Disclaimer
Nothing in this post should be considered financial advice. Trading and investing always involve risks and one should carefully review all such risks before making a trade or investment decision. Do not buy or sell any security based on anything in this post. Please consult with a financial advisor before making any financial decisions. This post is for educational purposes only.
The SPR is a tool used to alleviate the market impacts of both domestic and international disruptions, caused by among other things: weather, natural disasters, labor strikes, technical failures/accidents, or geopolitical conflicts.
Since the start of 2023, the SPR has drained by another 6.5% or 24 million barrels.
The SPR is comprised of 60 caverns, each one of which can fit the Willis Tower, one of the world's tallest skyscrapers.
The decision to withdraw crude oil from the SPR in the event of an energy emergency is made by the President under the authority of the Energy Policy and Conservation Act (EPCA) and done through competitive sale.
Perhaps what is so remarkable is that over the past 2 years, the Biden Administration has released nearly 300 million barrels of crude oil from the SPR, concurrent with the Federal Reserve undertaking the most extreme pace of monetary tightening on record in its attempt to maintain price stability, and yet crude oil prices have barely subsided.
In fact, in recent months, crude oil prices have surged, as shown in the chart below.
UKOIL
has been on an upward trajectory in recent months, soaring nearly 30% since June. On the higher timeframe chart, we can see that crude oil prices show strong upward momentum. As soon as the Federal Reserve pivots back to monetary easing crude oil prices will likely resurge.
OXY
Petroleum, showing the current bull rally could just be the first leg of a multi-year upward trend. The red line in the middle represents the mean price and each gray line represents one standard deviation from the mean. Perhaps the tendency of crude oil to rise in price over the coming years is why the Oracle of Omaha, Warren Buffet, began purchasing a large number of
OXY
Petroleum shares in 2022, accumulating more than a 25% ownership stake in the company by mid-2023.
Some financial experts are sounding the alarm about the SPR depletion. The founder of The Bear Traps Report, Larry McDonald, has indicated that the drastic decline in U.S. oil stockpiles, a critical asset in times of conflict, undermines America's energy security.
McDonald is warning that diminishing domestic oil reserves heighten America's dependence on imports, potentially exposing the nation to severe supply disruptions and extreme price volatility in the international oil market. Each time the price of crude oil subsides, petroleum exporting countries, including Saudi Arabia and Russia, cut production to keep prices higher for longer.
To some, it may seem that these production cuts are a gray zone tactic meant to deplete an adversary of its strategic oil reserves before engaging them in a conflict.
There is also collateral damage occurring to the U.S. dollar. The petrodollar system, which emerged in the 1970s when the U.S. abandoned the last vestiges of its gold standard, was a series of agreements between the U.S. and petroleum exporting countries to use the U.S. dollar for cross-border oil transactions. Since almost every country needed to import or export some amount of petroleum, the petrodollar system was a means of ensuring a perpetual global demand for U.S. dollars despite the currency not being redeemable at the Federal Reserve for anything of value.
As crude oil prices continue to surge, despite the Federal Reserve tightening monetary conditions at the fastest pace on record, a crisis is unfolding for developing countries that lack access to dollars. These countries are on the precipice of hyperinflation. In essence, by tightening the supply of dollars the Federal Reserve is exporting inflation abroad, especially to those that lack easy access to dollars. Consequently, countries at the periphery of the dollar access hierarchy are being incentivized, now more than ever, to turn to alternative currencies, thereby accelerating de-dollarization.
As oil prices continue their relentless march upward, the scenario continues to exacerbate inflationary pressures in the U.S., and even more so, abroad. Higher prices could compel the Federal Reserve to maintain higher interest rates for much longer than anticipated, even in the face of deteriorating economic conditions and rising unemployment, resulting in stagflation. Exacerbating the situation further are global climate change policy objectives, which act as a disincentive for countries to increase domestic oil production.
If a major geopolitical conflict occurs when petroleum reserves are depleted and production is constrained, the outcome could result in severe stagflation, as prices spiral higher even though economic growth stagnates in the face of a fragmenting world.
* * *
Important Disclaimer
Nothing in this post should be considered financial advice. Trading and investing always involve risks and one should carefully review all such risks before making a trade or investment decision. Do not buy or sell any security based on anything in this post. Please consult with a financial advisor before making any financial decisions. This post is for educational purposes only.
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