Release of Oil from the SPR – Desperately Trying to Fix the Economy

The International Energy Association (IEA) announced a plan today to make 60 million barrels of oil available to the market over the next month from the Strategic Petroleum Reserve (SPR), in response to the disturbance in supplies from Libya. Half of this oil is to come from the SPR of the United States; the rest is to come from SPRs of other members of OECD.

Both the amount and the timing of the release are strange. The amount of the release is equivalent to 2 million barrels a day. This is actually more than the Libyan disruption took off the market, which was about 1.4 million barrels a day. The disruption first took place in February, and oil prices have been declining since early May, so the timing is strange, as well.

Figure 1 - Brent oil price since January 2007

What the timing of the oil release is close to, is the end of Quantitative Easing 2 (QE2). QE2  is the United States’ program of buying back debt to keep interest rates low and the dollar low, which began November 2010 and is scheduled to end June 30, 2011. It was intended to stimulate the economy, and oil prices have indeed risen during most of the time it was in effect.

Today’s announcement of the SPR oil-release program was made by IEA, but a person can’t help but wonder if the United States wasn’t heavily involved in the decision. After all, the United States is the largest member of the IEA, and is making half the release itself. Also, when Ben Bernanke spoke yesterday, he didn’t have any financial replacement for QE2. The release of oil from the SPR looks as if it is the latest attempt to kick-start the economy, both of the US and other OECD countries, using yet another approach.

If we look at oil price and the S&P 500 Index (Figure 2), there has been a significant correlation between the two since late 2008. When oil prices drop, so does the S&P 500 Index, most likely since this means the economy is “tanking.” When oil prices rise, so does the S&P 500 Index, indicating the economy is working well.

Figure 2. Brent Oil Price and S&P 500 Index

The problem is that high oil prices soon sow the seed of their own destruction. Once the oil price starts getting high (over $85 is high, over $110 is very high), the high oil prices start causing recessionary influences, because citizens have to cut back on other goods, when oil and food prices start rising. Oil and food prices usually rise and fall together, because a lot of oil is used in food production.

No doubt one thing Ben Bernanke and other government officials are worried about is a repeat of the 2008 recession, or even worse. Their thought would seem to be, “If we can only get the oil price down, maybe it won’t sink the economy again.” If we look at US’s external debt (Figure 3), it started shooting upward, just as high oil prices became unsupportable by the economy in July 2008.

Figure 3. Average quarterly oil price and US Federal Debt

No doubt Bernanke and others have figured out the obvious–the United States is not in good enough shape financially to attempt another stimulus program, if recession hits again in full force. Letting oil out of the SPR would be a different way of perhaps getting the oil prices down, that wouldn’t “kill” the economy in the process.

What is good and bad about this approach?

The Good: Our real problem today is that we have extracted most of the easy-to-extract oil, and what is left is the expensive-to-extract oil, whose high price tends to kill the economy. The good thing about the SPR oil release plan is that it covers up our real problem for a bit longer, allowing the government to “kick the can down the road” further. Our huge debt problem is becoming totally unaffordable, especially if we should have to pay reasonable interest rates. This oil-release plan may stimulate the economy without borrowing, because with less expensive oil and food, buyers will be able to continue to make discretionary purchases, and business profits will look better. Voters are likely to be happy, too.

The Bad: The bad part about the SPR oil-release plan is that it tends to make the real problem of inadequate supply of inexpensive oil worse, long-term. The only way we get investment for more oil is through continuously high prices (and not too high tax rates). If we lower oil prices or raise tax rates on oil companies,we tend to choke back investment in oil. This makes oil prices higher in the long run. The only alternative to high oil prices is major economic contraction, because the economy can’t afford the high oil prices, and it can’t afford getting along without oil, because we need oil for cars, and trucks, and construction equipment, and for growing food, and for many other things.

One approach that might have helped, especially if we had started earlier, is more research on ways to extract heavy oil using less energy (and hence less CO2) in the process. We know that there is a great deal of heavy oil available, including some in the United States. If we had a way to get an adequate quantity of heavy oil out, in a way that didn’t send price too high, we would be in better shape from an oil supply point of view. (But probably not from a CO2 point of view).

Unfortunately, if high cost oil is what sinks the economy, high cost green energy is of very little help. We have been misled in this regard. It doesn’t even matter if the government provides a subsidy for expensive green energy–it still comes back around to sink the economy, because higher taxes are needed–either that, or it adds to the overly burdensome debt situation. Once citizens are charged higher taxes, the effect is very much the same as if citizens had paid the high prices to begin with–it reduces their discretionary income, and thus tends to be recessionary.

The government and the media have not been telling us the truth, in several respects:

1. The quantity of green energy that is made today is very low, and most of it is expensive.  It can in no way power all of our cars and trucks and farm equipment. Most green energy provides expensive intermittent electricity, which is not helpful in powering equipment that operates on oil. There is no way we can transition to green energy in any reasonable time frame.

2. The problem with high oil prices is likely not to go away in one month or twelve months, unless we sink deeply into recession. Because of this, as soon as the SPR oil-release program is discontinued, we are likely to have the oil price problem back again. A one month reprieve doesn’t get us very far.

3. The story about Saudi Arabia and OPEC being able to ramp up their production is mostly just that–a story. Maybe Saudi Arabia has a little heavy, sour oil to put on the market, but the stories about its huge spare capacity, and its ability to ramp up supply, should be taken with a grain of salt. Looking at a graph of OPEC’s historical oil production compared to oil price suggests that they simply lower production when price is not high enough.

Figure 4. OPEC and Non-OPEC Oil Production, Compared to Oil Price. (Production is Crude and Condensate from EIA.)

We have a lot of difficult choices ahead. Carbon emissions are a problem. We can get along without fossil fuels if we do things as our forefathers did. We probably can’t grow as much food, or support as large a population, though. So making a change of this type would be very difficult.

We don’t really have any green energy alternative that we can easily slide over to. There is some chance this option may be available in 50 years, but it isn’t available to a significant extent now.

The only other way of getting off oil seems to be deep recession, and nature provides it for us, as a by-product of high oil prices. If people don’t have jobs, they can’t afford to buy goods made with oil, so they use less. Governments find themselves in poor financial condition, so cut back programs, also reducing oil use. Those who are working find themselves with lower salaries and higher taxes, so they also cut back also.

Bernanke and others are doing their best to keep the economy going a bit longer. We can cross our fingers that the SPR oil-release program will work for a bit, but we shouldn’t kid ourselves that it will in any way fix the economy’s underlying problems.

About Gail Tverberg

My name is Gail Tverberg. I am an actuary interested in finite world issues - oil depletion, natural gas depletion, water shortages, and climate change. Oil limits look very different from what most expect, with high prices leading to recession, and low prices leading to financial problems for oil producers and for oil exporting countries. We are really dealing with a physics problem that affects many parts of the economy at once, including wages and the financial system. I try to look at the overall problem.
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85 Responses to Release of Oil from the SPR – Desperately Trying to Fix the Economy

  1. Jb says:

    Gail, could the release from the SPR be a cover for Saudi Arabia’s declining production following the recent split at OPEC? http://www.nytimes.com/2011/06/11/business/energy-environment/11oil.html. What if they can’t “go it alone” anymore? Great piece; thank you.

    • I think it is trying to buy the world markets a little time, to see if Saudi Arabia can actually raise production a bit. I don’t think we really know what Saudi Arabia does until after the fact (assuming the numbers we see are right). The article you link to talks about the Saudi newspaper Al-Hayat making a statement that Saudi Arabia would increase production in July to 10 million barrels a day from 9.3 million barrels. Saudi Arabia didn’t deny the story, so the assumption was that that was right. Even if this is a true statement of Saudi Arabia’s intentions today, we don’t know that they will actually be able to carry through with it.

      Saudi Arabia’s oil production varies, depending on whether a person counts natural gas liquids in the total. If they are in the total, Saudi Arabia’s oil production has been above 10 million barrels a day, for quite a while. On a Crude and Condensate basis, EIA shows their output at 8,940,000 barrels per day in March. There is not a single year since 1980 where Saudi Arabia’s crude and condensate production reached 10 million barrels a day (the years shown in EIA’s database now), although I think it may have earlier. So hitting 10 million barrels in July would be a huge accomplishment for them.

      • Owen says:

        I took issue with timing conclusions below, but for this point here, two other issues:

        1) The US SPR is there for a reason, and it’s not to keep prices at the pump low. It’s to provide warships and fighter jets fuel to break an oil blockade imposed on the US at some inevitable time in the future. You think the prices are high? What do you think they’ll be if there is a naval blockade of US oil imports imposed by . . . whomever? It doesn’t matter who. A cooperative venture by . . . whomever . . . would be an act of self defense in that the US is burning up oil they (whoever) needs.

        2) Buying time doesn’t work when production is in decline and consumption is rising. Buying time in such a situation is like the company losing money on each unit sold but hopes to solve the problem with volume of sales.

        The release is being done to manipulate the market price lower. It’s not all that much more complex than that. Sure, next year is elections, but a lower price is an easy goal to please both administration economists as well as the re-election campaign staff. The reality is the IEA was sought out to provide a way to scare traders — as evidenced by their text mentioning that this amount may be followed by more.

  2. Thomas Schaffter says:

    Thanks for all your good work.

    I don’t understand your dismissal of green energy. I’m not saying you’re not correct, just that I don’t understand.

    It seems to me that at *some* oil price point, green energy *must* be cheaper, even including the infrastructure of electric transportation. And I think this comparison has to include in oil the price our best statistically-based estimate of its current and future cost (1) to our military and other defense institutions and (2) related to climate change. I know there are tremendous uncertainties here, but I believe almost all scientists believe these costs are real and significant. In fact, perhaps under this method of pricing oil, green energy is already cheaper.

    Of course the additional, indirect costs of oil don’t *have* to be included (but isn’t that just pushing the ball down the field a little). And maybe you believe, and maybe it’s true, that the economy will completely collapse before this point is reached by the *direct* costs, and so there is no reason to consider it. Maybe it’s true that the economy can’t afford this price level for energy and that economic retraction will keep it below green energy prices — are you assuming something like this?

    Or maybe I don’t understand the issues at all, a definite possibility.

    I would appreciate your help understanding your position.

    • Our salaries are what they are. At this point, we don’t pay for the externalities. If the prices did include externalities, we couldn’t afford very much coal and other fossil fuels. Our standards of living would have to drop greatly. Pricing externalities in would cause huge recession.

      What matters is the (1) the actual price of fuel, compared to our salaries, (2) whether a new fuel can be used to run our vehicles today, or if we have to abandon our current vehicles, and buy expensive new vehicles, with essentially no trade in, and (3) whether the green energies are actually scalable to any reasonable size. There is also the additional issue that the green energies aren’t all that green, because they use oil and coal and natural gas in their production and transport, and because they often use rare earth minerals. Rare earth minerals may not be available in enough quantities to scale up. They also have pollution issues.

  3. Ed Pell says:

    My take on the release is that they are trying to avoid a spike to $150 rather than make it cheap. But even if they hold $105 that will still wear the economy down just a bit slower.

    I agree with Gail that the time scale for building a sustainable energy system is of the order of 50 years. I also agree that lifestyle will drop significantly over the next 50 years. But I do not see a die-off in the US. People will have to car pool with 4 people per car rather than 1. Extended families will share the same house. Medical care may be limited to $50,000 per person for a lifetime. Back to about 1950 lifestyle. People did life and were happy even in 1950.

    If the federal government wanted to do something useful it could build prototype sustainable energy plants. Each year it could spend 100 billion dollars on ten different kinds of generation and or storage (10 billion each). And keep doing this until we are 80% sustainable.

    • John Komotos says:

      Ed, with all due respect, I think you are overly optimistic about avoiding a mass die off. You live in rural Vermont, right? I live in the Bay Area. People here might be collectivist in theory, they are NOT in practicality. At all. They already will run over old ladies, push people around to get what they want, and are completely disrespectful of each other in every way possible. They are not friendly, helpful, caring, or compassionate. Oh sure, you find a few people that are, but it sure seems like most hate each other and everyone else around here. I mean, forget racism, they all act terrible of all stripes, very little difference between the wealthy whites and the poor blacks or vice versa. So we got what we wanted, I guess…equality of nastiness.

      My question to you is, if people in big cities already can’t peacefully coexist….how the hell are they going to do this when resources get smaller and smaller? I just don’t see it. I see all hell breaking lose and I am moving up North ASAP.

      • Owen says:

        Almost no one can survive in place. North has a particular merit in that people, thinking they are smart, will flee winter.

        But winter, a distinct challenge, is not the primary threat to survival post Peak. Other humans are.

        The point being, most will flee to the south. Going north challenges you with winter, but your primary threat will be less northward.

      • Ed Pell says:

        I live 100 miles north of New York City. I have thought about what trees to drop with the chain saw to block roads to deflected the hoards from NYC from my neighborhood. But I expect Americans are too well broken to take any action even when if they are starving to death. And I expect the government to be smart enough to keep the cheese and powered milk and high fructose corn syrup flowing.

        • Owen says:

          Doomer scenarios seem to get evaluated not on the merit and credibility of their details, but on simply body count. The higher the body count, the less credible they are declared to be.

          My projections are 10-15% of a city’s population will have the gumption not to sit back and yell for the government to solve the unsolvable. I think fully 20% of those will be armed gangs, because the criminal element has, if nothing else, gumption.

          Felled trees don’t stop light infantry, organized or not. Sorry. But you’re north. That’s good. That won’t be the preferred direction to flee for them. OTOH, Buffalo will be headed towards you. Or Canadian cities.

        • John Komotos says:

          I live 24 miles from downtown San Francisco. I am not sure whether it is better or worse than NYC in terms of which is to be more feared as things get worse. I know that I plan on moving North to Ukiah or maybe even Redding in the next few years or sooner if need be as like I said…the people around here are already nasty to each other and can’t get along. I can’t image what it looks like with less resources. I have debated leaving CA as a lot of the laws here I would not consider conducive towards survival but the growing season and how some people are already living in Mendocino and Humboldt counties is exactly how I think you need to do things in the future.

          I don’t really think this is a doomer scenario. I expect things to stabilize after some years of hell and danger. I do expect their to be what I now call Mass Die Off. This will largely be those who refuse to change, adapt, or come to terms with the fact that reality is changing. Considering how terribly foolish so many people are in the really dense urban areas of SF, Oakland, San Jose, and the LA complex…and no, that’s not a racist comment, the whites are as stupid as anyone else, I expect a lot of Mass Die Off in these areas. I am prepared for years of hell for myself and my family. I largely fear what others will do as I am not a big believer in the goodness of human nature….especially when people are starving.

    • Joe Clarkson says:

      Some of the largest renewable energy projects in the US were rapidly constructed in the midst of the Great Depression. Think Grand Coulee dam and TVA.

      I think a strong case can still be made that there is enough fossil energy left in the world to support a transition to 100% renewables, which could then be self sustaining. The main problem is political will. If everyone could be persuaded to live on an energy budget far below what they now consume, end consumption of anything not absolutely essential to life and reserve all of the energy and material savings to construction of an energy system that would be self sustaining without fossil inputs, it could be done.

      Unfortunately, none of the required political will for such a plan exists today. If a political leader told us, “I want you all to live in poverty, work hard for rewards that will accrue only to future generations and make all your sacrifices so that we can live without fossil fuels and save the earth”, how far would he get? Ha ha ha. Jimmy Carter was booted out because he suggested “sacrifices” such as wearing a sweater and turning down the thermostat a little.

      Now all we can “hope” for is an economic collapse and mass depopulation soon enough to save the world’s climate and ecosystem. We should all be ashamed of ourselves.

      • You talk about a transition to 100% renewables, which would be self sustaining. We are no-where near being able to do that. All of our “renewables” are very fossil fuel dependent. No matter how many people and how much money we put toward it, we aren’t at the place where we can make anything that is self-sustaining, except planting seeds and growing animals. Entropy takes its toll. and anything we make is soon gone.

        • Bicycle Dave says:

          Hi Gail,

          No matter how many people and how much money we put toward it, we aren’t at the place where we can make anything that is self-sustaining

          This appears to be a very critical issue – if this point was made clear and validated by the most credible sources, perhaps we would have a place to rally support for more realistic political policies (in all sorts of ways). So far, I’ve not found such a source that the average journalist or politician can “take to the bank”.

        • RobM says:

          Dave,
          In my opinion the best source of data on what is and is not possible is David MacKay’s book “Sustainable Energy Without the Hot Air”. Unlike most he uses physics rather than magical thinking to analyze the opportunities.

          http://www.withouthotair.com/download.html

          • Thanks! I hadn’t looked at that recently. His views are pretty much identical to mine, but he has more of the physics background. I learned what I did from various sources, including his book.

  4. velofisch says:

    You might be right with green energy if our aim would just be to avoid the oil price climbing above 140 $. I do not think that a price tag that low would mean anything in the long term. With peak oil the price keeps climbing – only interrupted by short and abrupt falls because the economy has to adjust to the new price level.
    Green energy is going to look quite cheap when oil sits at 200 USD per barrel. And green energy will not continue to rise but is going to get cheaper with future advances (though some raw materials and production costs might get more expensive, the overall costs will still get down).

    So green energy (solar, wind, geothermal and above all efficiency gains – not nuclear or agrofuels that are not green) will be a solution – they can’t save us now from the imminent recession but they can save us from an oil price that is going to rise above 200 USD/barrel – a price tag which you can expect otherwise within 5 years time.

    Today a lot of fossil fuels are used to generate electricity. Producing electricity from wind or the sun will save a lot of oil and natural gas for usages where you are not connected to the grid.
    A lot of transportation can also be electrified – saving again a lot of fossil fuels. So green energy can go a long way before we have to produce artificial methanol or hydrogen from electricity (which is of course possible but very inefficient).

    • Secondlawrules says:

      Since Jimmy Carter is much being mentioned here, let me relay a recent crossing of paths with him that I was privileded to enjoy after attending church services at Plains, Geogia Baptist Church.One of the highlights of so attending is to have your picture taken with President Carter and his wife, Rosalyn after the service. Participants are told not to interact with either,and not to touch either, but to look into the camera, smile, click and move quickly on. I could not resist doing otherwise. being in presence of the only President ever to actually try to deal with our energy situation.

      My words to Mr. Carter, “Thank you Mr. President for having the courage to raise the issue of oil field depletion at a time when this country could have still done something about it.” He quickly reached across his wife, looked me straight in the eye, and said, “It’s going to get a lot worse.”

      This brief encounter ended my privileged conversation with the former President. Would that our current President be so candid with the Ameican people.

      • Thanks for sharing your experience with us. I am a big fan of Jimmy Carter.

      • RobM says:

        I re-listen to Carter’s malaise speech from time to time. He was spot on. This and many other recent examples are proof that politicians are not the problem.

        Uniformed short sighted greedy scared citizens voting for the wrong people are the problem.

  5. Owen says:

    Afraid I have to rain a bit on the timing parade.
    The idea would have taken weeks to orchestrate. The timing of the announcement has to be thought of in that context. Not that QE2 is ending in June. What was ending in May? And it’s my understanding the oil doesn’t release until August.

    • The response seems to be to the announcement, as much as anything.

      I think there are a lot of bad things coming up–end of QE2, problems with US debt and budget, and international debt problems. Having something to offset them, even if the timing isn’t perfect, is probably what Bernanke and company are looking for.

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  7. Perk Earl says:

    I take the position of agreeing with you Gail on the timing. In fact the timing seemed so obvious I thought the media should have been able to connect the dots, but maybe that’s giving MSM too much credit.

    The price of energy is either cheap enough to generate wealth, i.e. high percentage GDP or expensive enough to dampen economic activity to the point that intervention in the form of stimulus, QE’s and now SPR withdrawals are required in order to keep the ship afloat a little while longer.

    Saw a post not long ago that struck of truth, in which it was asserted that with relatively high priced oil the choices are defaults or inflation. With fiscal policy unchanged expect lots of defaults which leads to more and more disenfranchised and eventually to unrest. With fiscal policy aimed at kicking the can down the road, like QE’s, the risk is inflation, and if not stopped at some point the real possibility of hyper-inflation, and I think that’s the only reason Helicopter Ben finally decided to try ending QEII. I say try because he left the door open for more QE’s if the economy falters.

    As we move forward in time with high priced oil, the choice is defaults or hyper-inflation. Not good choices, but they are the only choices if energy prices remain relatively high, i.e. relatively to what the economy can handle. Good for you Gail for seeing this untenable situation for what it is.

    • It is hard for me to see why others don’t make the connection. Eventually the truth will be known.

    • Ed Pell says:

      The only bonds I own are my share of social security and medicare. I know I will not be paid on either of these. The federal government will default on both. So I do not care about defaults. Let all debt slaves default. I loose nothing (more). So here we are debt free and ready to plan a future.

      • Bicycle Dave says:

        Hi Ed,
        I suppose it is quite possible that the US government will default on SS and Medicare. However, I think we should be realistic about the consequences if that should happen. Many millions of seniors will not be “ready to plan a future” – they will simply die within a couple of years. Much has been written about cultures that stop caring for their elders – not a good sign.

  8. Mark Fisher says:

    The release of oil from the SPR did not cost any lives, There was no invasion under the false pretenses of eliminating a dictator, there were no human injustices against a population are disconnected from. If the SPR release buys time, enough for someone to afford a little extra for their families food budget etc etc while driving to work and paying for housing,. than so be it. The various emails above all have good points but the bottomline is that we will not be able to solve our problems in the near future. We have to deal with the here and now. Drill baby drill is a mindless exercise since noone knows extactly where to drill to recoup your drilling costs let alone tap into that mystical Saudi sized oil well. No.one has a good clue where to drill or can’t face the fact that the oil to run things is getting harder to get and most importantly harder to maintain that flow that we need. ………period. Releasing the SPR simply gives us a reprieve from the approaching pain. All other avenues are closing,…. high speed rail is being defunded, Energy research is scrapping the bottom of the barrel for funds, there are no rescue technologies on the horizon, there are no private businesses out there that want to take a chance and save our American butts, there are no real concerted efforts to save oil etc. Kansas just passed a law allowing drivers to increase their speed to 75mph because no one is going to tell Joe Schmoe how fast to drive or what vehicle to purchase etc), I have watched this dance play out for the last decade. It is going to end badly…. and I wish to hell that I was dead wrong… but the science and the facts tell me otherwise.

  9. Shunyata says:

    POINT 1: Public Debt and Unfunded Liabilities in the United States total about $540,000 per household. There is no way that American households can save this kind of money.

    POINT 2: No change in taxation can alter Point 1. That kind of savings rate will devastate the economy. The only “tax” that could make any difference is a wealth tax – a tax on pre-existing assets – to redirect accumulated savings.

    POINT 3: A growing economy can reduce the savings needed to fund Public Debt and Unfunded Liabilities. But GDP net of debt growth has been nearly flat or negative each year for the last decade. Energy and natural resource cost/availability, whether due to exhausted supplies or increased global demand, is a likely driver of this non-growth and will be an increasing constraint.

    COROLLARY: Public Debt and Unfunded Liabilities will not be paid in full, irrespective of our feelings about the matter.

    • A person almost wonders about the FSU example–become a “former” if the debt issue becomes too great. Let a whole new government be formed which has not made these promises, or let the government fall back to the individual states.

      • Ed Pell says:

        I think this is the solution. Basically bankruptcy. Unfortunately it would have to be federal, state, county and town. That is frightening.

  10. Les D. says:

    The most startling feature of this release of oil is the effect on the price of oil: think about it: adding about seventeen hours of oil consumption to the market, spread over thirty days, has dropped prices by about 5%.

    Oil demand is INELASTIC!

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