Prepare Yourselves for $5 per Gallon Gasoline

We are extremely lucky that the oil companies became less greedy.

amp.cnn.com/cnn/2022/08/15/energy/gas-prices-falling-oil/index.html

Prepare yourself for $3 per gallon gasoline?

I don't think so, but it is an odd punctuation mark for the discussion.

He's at it again, pledging to empty another 10 million barrels from the SPR in November, after the 180 million barrels for the 6 months ending in October.

www.foxbusiness.com/politics/biden-release-10m-more-barrels-strategic-petroleum-reserve-november-wake-opec-cuts

I will admit, this is pretty much the smartest short term political decision Biden has made. Note I say political decision and not a strategic decision for the nation. No one is going to miss this this reserve until there is an actual emergency. Like telling your spouse you have life insurance when you don't. No one gets hurt until you die and leave a financial mess behind. But releasing the 180 million barrels of oil from the US SPR and getting our allies to release another 60 million from theirs has covered-up the underlying trend of lowering crude stockpiles worldwide. Here is a graph of OECD petroleum inventories ending in the first 3 months of SPR releases.


Double click on image to enlarge

Note the dashed line on the graph for April through July, 2022 which is the trend without SPR releases. Worldwide inventories have only started rebuilding and gasoline prices lowering because of the SPR releases masking what would have been a continuation of depleting inventories. 

More recently, the Federal Reserve's war on inflation and their raising of interest rates have sparked concerns for a world-wide recession. The theory being a recession will lower oil demand and lower oil demand will mean lower oil prices. The problem is recessions don't always mean lower oil demand. For example, in 2 of the last 4 recessions (the  recessions of the early 1990's and 2001) the result was still an increase in oil demand. It just grew at a slower rate than without a recession. 



The only actual decreases in oil demand occurred in the Great Recession of 2008-09 and the Covid-19 Lockdown Recession of 2020.

So the world is depending on the US Federal Reserve to create a recession in order to lower oil prices. If that wasn't bad enough, now you have OPEC+ cutting 2 million BOPD to counter the fall in oil prices caused by the forecasted recession related  to demand destruction. That in turn has Biden releasing another 10 million barrels of oil from the US SPR.

This a like a game of chess with our chess master being Joe Biden. How long before we get checkmated? 

Things are turning ugly in terms of diesel inventories.

oilprice.com/Energy/Crude-Oil/Diesel-Crisis-Deepens-As-Inventories-Fall-To-Dangerous-Levels.html

US distillate stocks (which includes diesel, jet fuel, and home heating oil) have fallen to 106 million barrels, which is the lowest since records of these stocks began back in 1982. Europe is doing a little better, with distillate stocks at 360 million barrels at the end of September, the lowest seasonal since 2007.

In an example of how the US exports our inflation to the rest of the world, "Reuters reported earlier this month that at least three tankers carrying diesel from the Middle East had changed their course mid-journey and were now traveling to the United States. And this new competition is about to intensify".

www.reuters.com/business/energy/traders-divert-europe-bound-diesel-us-race-re-stock-2022-10-14/

Right now, Europe can still purchase diesel fuel from Russia, but this is about to end in February of next year as new embargos against Russia go into place. Europe will need to outbid the US then for their fuel.

"The foundation of the shortage is the gap between refining capacity and fuel demand. The pandemic saw a lot of refineries close, especially in the United States. It wasn’t just the pandemic itself—the anticipation of a boom in demand for EVs that would render a lot of refining capacity obsolete also had a part to play, as Reuters’ John Kemp noted in a column last week."

www.reuters.com/markets/asia/diesels-gloomy-message-global-economy-kemp-2022-10-14/

Some more "gems" from the Reuters' article:

Once more of China is freed from Covid Lockdowns, their refinery capacity might be able to meet world demand; however, "accelerating refinery processing will simply push the shortage upstream from the fuel market to the crude market".

"In the absence of major new additions of crude production and refinery capacity, the only path to market rebalancing is through a sharp deceleration in fuel consumption to stabilize then rebuild distillate inventories.

Distillates are overwhelmingly used in manufacturing, freight transport, farming, mining, forestry, and oil and gas extraction, so consumption is driven primarily by the economic cycle rather than prices.

The need for a major reduction in consumption from trend implies a relatively severe downturn in the business cycle across North America, Europe and Asia.

The U.S. Federal Reserve cannot drill oil wells or build new refineries, but it can reduce fuel consumption by raising interest rates and inducing a broader slowdown in the domestic economy and major trading partners.

U.S. interest rate traders anticipate the Fed will raise its target for the interbank federal funds rate to 4.75-5.00% before the end of March 2023, up from 3.00-3.25% at present."

I'll add that if a Federal Reserve induced recession isn't enough to decrease demand (and I don't think it will), then an increase in oil price is needed. From what I've read, that requires oil going to somewhere between $130 and $180 per barrel.

Key takeaways:

1) Money printing by the Federal Reserve to fund Biden's Green New Deal and social-welfare/vote buying schemes has sparked inflation that now must be killed with high interest rates similar to the 1970's when Paul Volcker was Chairman of the Federal Reserve.

2) The Green Utopian dream of EV's has led to the closing of some oil refineries that needed upgrades and others to not expand their capacity as needed to satisfy demand. The costs for such need 20 to 30 years of guaranteed demand which isn't suppose to be there due to EV adoption. 

3) Oil companies aren't investing in new exploration and development because they are being told their production will not be needed in the Green Utopia of 2030 onwards.