Friday, July 18, 2008

More Oil?

It's time to put the nail in the coffin of high priced oil!

The leadership in Congress is currently considering legislation that would begin selling oil out of the SPR. This strategic petroleum reserve currently has over 700 million barrels. This is a position I advocated several months ago. My interest is to change the supply/demand characteristics of the world and more importantly the US. We could begin selling the oil at say 250,000 barrels per day increasing over 90 days to 1 million per day. Worldwide demand currently exceeds supply by about that amount. We could stop when either demand matches supply or the price is driven down to strong support levels of about $85 per barrel. Further we would be selling oil at above $100 that was purchased as low as $20. That's a good deal on any ones ledger.

The main objective here would be to punch oil prices down through current support at $130. It is down about $17 mostly on demand destruction. However more demand destruction equals slowing economic activity or recession.

I know the Dem's want to spend the proceeds on research of alternative energy sources. That's ok with me. My main interest is giving the citizens of this country a real break of almost a 50% potential drop on the gas they need. This is the best stimulus we could hope for and the government actually makes money doing it.

Republicans should seize on this issue and pare it with offshore drilling. A compromise bill of selling SPR oil and offshore drilling might actually show the American people that congress can actually do something that is worthwhile and effective.


Tyler Craddock said...

Good post Brandon. I would argue that if this is done, the funds should be used for some sort of one-time capital expense so that what are not ongoing revenues are not incorporated into ongoing expenditure items. My first choice would be to finish important broad transportation infrastructure projects that support interstate commerce (e.g. rail diversion programs to inland ports, interstate capacity and safety improvements, etc.) so that we could hopefully keep this money from being used for local pork like bridges to nowhere.

ronbailey said...

How would you propose we blunt the increased demand that would result from the temporarily lowered prices? Specifically, how do you offset the increased demand from places like India and China?

Dipping into the SPR is like paying your bills with a credit card - you might buy some time and keep the wolves from the door for a while, but you haven't done anything to fix the underlying problem.

Bubby said...

You make no sensible argument, nor is there one, that simply pumping our strategic petrol reserve will lower prices at the pump. We're in a speculative oil bubble and we'll soon need a wheelbarrow load of worthless dollars to buy that oil.

The "Republican Revolution" brought us unregulated oil commodities markets, and a devalued dollar courtesy of record deficit war spending. America can't afford much more of this Republican "brilliance".

Brandon Bell said...

Tyler-- I agree. Maybe add the funds to each state federal highway allocation for capital projects.

Ronbailey and Bubby--I don't have enough time for an economics lesson but simply stated my plan would puncture the bubble not change the long term need for more oil. That would would come from drilling. The world currently produces 85million barrels a day but demands 86. This imbalance has been created largely over the last 9 months. By adding to the supply over the short term you can burst the bubble much like the dot com burst in 2000. That year the nasdaq broke 5000 and is less than 1/2 that now. My hope would be an oil price of say $85 a barrel that , yes, would go back up but much more slowly as more supply came on board. Hence the need to drill.

Also Ronbailey I believe China's demand will change dramatically after their olympics in August. 40% of their GDP is goverment spending. A normal reduction here will greatly ease long term demand growth.

Hey Bubby selling oil out of the SPR is currently a Dem House proposal!

Mike said...

I still think this is a bad idea. Borrowing from government programs that serve an entirely different purpose is a mistake our government makes way too often.

The SPR is for dramatic supply disruptions and is primarily for national security purposes. With the possibility of an Israeli attack on Iran increasing by the day, we need to keep the SPR ready for its intended purpose.

We can have the same price effect as dumping the SPR into the market simply by beginning to drill. Now they are saying we can start producing off CA in less than two years. If we started drilling, prices would drop today as the market would foresee the increased supply.