Time to Fill Up on the Strategic Petroleum Reserve 27 comments
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Gasoline has fallen to $1.99 a gallon here in my neck of the woods. Everyone seems to be really happy about this. However, it will come as no surprise to my faithful readers that I can even find problems with cheap gasoline! Cheap oil and gasoline will simply reinforce the uninformed American public's opinion that they have an inalienable right to oil which is both plentiful and cheap. Read some of the editorials in the latest financial magazines and you will see that $145/barrel oil and $4.50/gal gasoline have already been long forgotten (it was only 6 months ago).
So what do I propose? Well, at a time when the US government is printing trillions of US dollars to, as Jim Rogers says, "transfer money from the competent (the US tax-payer) to the incompetent (bankers, Wall Streeters, insurance & automotive execs)", and since the US dollar is strong (?), why not use some of these paper dollars to fill up the Strategic Petroleum Reserve? I mean, if Bush thought buying oil at over $100/barrel was a good idea, it must be a real steal under $60. Besides, the next oil crisis is going to be a real doozy! Don't believe me? Just look at all the canceled production projects recently as the credit crunch and cheap oil take their toll. Meanwhile, the skeleton-in-the-closet (oil reservoir depletion rates) keeps knocking most mature oil reservoir yields at about a 6% a year clip.
The SPR has a capacity of 725 million barrels and is currently filled to about 700 million barrels. So, the US government should go ahead and turn on the 70,000 barrel per day shipments to the reserve and continue to fill it to the brim. We're going to need it down the road, you can be sure of that. Even at full capacity, the reserve would only provide roughly a 60 day supply of our foreign oil imports of some 12,000,000 barrels per day. That said, you just know there is going to be a crisis in the Middle East some day soon. Or Russia. Or Venezuela. Or Nigeria. Well, you get the picture.
So, yeah, let's fill up the SPR and get something for our somehow strong currency. Also, let's go ahead while oil prices are low and put a $0.02/gallon "green tax" on gasoline with provision that this tax bypass Congress and be spent directly on public works projects (providing employment) to build out the following:
- nat gas cars and trucks
- nat gas refueling stations along the interstate highway system
- a nat gas appliance for garage refueling
- solar and wind projects
- the electric grid to take solar and wind power and transmit it to urban centers
These simple and straightforward initiatives would not only help the recession (will it turn into a depression?) by employing thousands of Americans, they would also have the huge benefit of reducing America's dependence on foreign oil, and cleaning up the environment at the same time. Long term, these infrastructure plays would pay for themselves many times over, much more so than giving the billionaires on Wall Street and in the banking, insurance, and automotive industries yet more money. I call this socialism for the rich, or, as it should be called, fascism. Where do they put all their billions? They sure aren't investing in the stock market...perhaps they are buying European municipal bonds.
Meanwhile, use the stock market crash to snap up energy stocks on the cheap. ExxonMobil (XOM), ConocoPhillips (COP), Chevron (CVX), and BP are all screaming buys, even if oil does go to $50/barrel. Chevron just pumped first oil from Blind Faith today. BP's dividend yield is fantastic and yet the new CEO says the company prefers to raise the dividend as opposed to buying back stock. Exxon, to my extreme regret, does not buy into this strategy and continues to spend shareholder wealth on stock buybacks instead of increasing its dividend. I still own the stock (how can you not?) but boy I'd like to give its management a swift kick in the pants for such a puny dividend on the heels of huge profits, cash flows, and the healthiest balance sheet in the business.
A better play short-term might be the large US natural gas producers. These stocks are ripe for the picking. Note StatOil's (STO) recent investment in Chesapeake (CHP). It will be very interesting to see what the first big takeover offer is in the energy patch...
Disclosure: The author owns all of the stocks mentioned in this article (XOM, COP, CVX, BP, STO, CHP).
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This article has 27 comments:
Same is true your your modest tax propopsal. Tax phobes will scream about it ( and about anything else that has a "public good" ring to it), but the private sector hasn't addressed the problem of developing viable alternatives foreign oil dependence since, maybe 1973. I think that's the first time I remember sitting line for gasoline, under thumb of foreign suppliers. The effort could use a push. Or maybe some would argue that cheap oil is here to stay. Uhh ... ok. Until next time.
As you suggest, energy companies are incredibly cheap now. Every so often we get it in our heads that oil investing is obsolete. I'd like to publicly thank all who think that and are dumping their shares. The majors you mention are superb investments. You didn't mention the best deep drillers that are also out of style -- I've been steadily buying Noble (NE), most recently for $26 and change. Just in case we again decide that we need a little more oil someday.
NG (like oil) is a short term solution. There is only a finite supply and after it peaks, the drop off is much sharper than oil.
A better solution is next generation biofuels like ethanol made from cellolusic (non-edible plants), algae and sweet sorghum.
Obama has energy independance as a #2 priority (a good thing), but the economy will take up 95% of his effort. In the best case we are looking at a 2 yr recession or worst case a 10yr depression ahead of us.
we shoulds pumped saudiland dry first.
> jack
If all the major users of oil are buying futures contracts then the price has to have a bottom right around the corner. I remember how smart UPS and Southwest Air were suppose to have been during the last crisis because they had hedged. Any major user of gas or oil has to be hedging now as far out as they can get. If they are not then fire the management.
note CHK is the symbol for chesapeake.
The Saudi producers could not vote in the 1956 presidential election, so why do you think Eisenhower imposed an import duty on all imported oil (except from Canada & Mexico) in favor of all the independent producers in Texas (including George Bush Sr & his company Zapata Petroleum) ?
Cars are one of the biggest user of oil, hence they must be contributing to CO2 build up in th atmosphere, hence look out for the carbon tax.
It is also coming in your electric bill, as greedy politicians begin taxing utilities emitting CO2, read coal and natural gas fired power plants. These polluters of CO2 will be taxed for their carbon emissions and those taxes will be passed right on to the homeowner and factory and office as a new and major cost increase.
Just what we need in a recession, fast becoming a major one, more taxes. Say good by to more jobs as these taxes start hitting the economy.
The other long term side benefit in developing 'local and diffuse' sources of energy is that this will reduce geopolitical tensions.
Wind power, solar power and biofuels can be produced virtually anywhere. The technologies are simple and proven. Every nation can do this. There is more than enough renewable energy to supply ALL of the world's energy needs.
If you remove the tensions due to the procurement of energy, there will be fewer reasons to station large armies in the desert.
From being in this industry, I know the economics are currently marginal for these projects. But society needs to grow up and make sacrifices if necessary to do the right thing.
We all know we have to employ all available energy sources and also develop new and better ones. It would be folly to not rely on proven technology such as NG, oil, coal, and nuclear until we have efficient and dependable alternatives. Sure, biomass ethanol has promise, and it makes everyone feel good to imagine growing some grass and turning it into ethanol to power our cars and trucks, but I sure would not gamble our future on a hope and promise.
> jack
Respirate: hello - your adage is most appropriate. thanks for the supporting comments as well.
longoil: NG is a short term solution only if we get started now. that said, there are huge reserves of natural gas all over the world, which can power the worlds cars and trucks for 50 years or more. i'm not against biofuels, but if we can't even get the country to turn on to nat gas powered vehicles, how in the world can we get biofuels going? nat gas powered transportation is just a no-brainer. as far as the economy goes, i would agree we are in for a very very long haul. the concentration of wealth into the hands of the 0.001% of most the most wealthy (and well connected..) in the last 8 years can only have disastrous consequences.
johnsgordon: and then when the saudis run out? what then?
long_on_oil: i'd hate to have been in charge of energy hedging at a major corporation. i would have made terrible bets. as much as i have bashed george bush's economic policies and his administration's lack of competency, in my wild dreams i never foresaw the financial system meltdown which has led to energy demand dropping off a cliff worldwide. sorry for the CHK symbol and thanks for correcting my typo.
bluesmoke: i've sent the Obama campaign my energy policy at least 3 times. i started back at the beginning of his campaign when i could tell his advisors were slow to pick up on the energy priority. i'd would love to talk to Obama about energy..and the first thing i would tell him is that windfall profits taxes are a BAD idea and will lead to the next oil spike being even bigger than i think it is going to be now (which is *big*). anyhow, i was just dreaming thinking they would ever listen to me. but thanks for the vote of confidence. i do believe obama will at least begin an energy policy, which is something we certainly do not currently have. wish they would call me though, i need a job now that my investments have all tanked...
kreg: of course gasoline powered internal combustion engines are contributing to CO2 in the atmosphere - in fact, it is at the rate of 19 lbs of CO2 per gallon of gasoline burned (!).
engineer: thanks - i'm an engineer too. i agree with your comments.
iThinkSmall: folly? you act as though natural gas cars don't exist. they do exist and the technology has been around for decades. countries like iran and brazil (oil exporters i might add..) see it in their interest to buy and/or convert their cars to it. there are millions of nat gas cars and trucks all over the world (just not int he US). so, why is it "folly" to think that a country that imports 12,000,000 barrels of foreign oil a day (70% and i am speaking about the US in case you are not keeping up) should do likewise? There is only one nat gas car for sale available in the US today, the Honda CIvic GX:
automobiles.honda.com/.../
but i can't even buy it in my state and it is generally not practical since the home refueling appliance is $4k and you can't fill it up anywhere. thus, my recommendations in the article. it is not folly to believe that the US can continue to wave a wand and get all the foreign oil it needs in the future. it is lunacy. that is reality. it is insane that the US has such large reserves of natural gas and we, due to ignorant policies, prefer to send our dollars to our enemies overseas. absolute insanity.
c300man: i wish "we all know we have to employ all available energy sources and develop new and better ones." perhaps you can go to washington and clue congress and the administration in on this self-evident fact. there sure as hell aren't listening to me, and i have been bangin on em for 8 years now.
I agree with you 100% that there is huge gas reserves around the world and with the implementation the Pickens Plan in the USA.
My concern is that most of world's natural gas supplies are controlled by very hostile nations like Russia, Qatar and Iran. They are talking about forming an "OPEC" like NG cartel. If they succeed they would make OPEC look like very tame in comparison.
a gallon of water weighs 8#'s, i suppose gas has similar density, so one gallon of gas weighs lets say 10 #, and when burned in an internal combustion engine, that produces 19 #'s of CO2???
How could you possibly produce more CO2 by weight, than you consume in gasoline? dont forget, air is mostly N2 and some O2 and very little CO2 is naturally in air.
I question how you get these figure?
thanks for being accurate with your figures.
kreg: you must have missed the discussion on CO2 emissions the first time i explained it in this forum. the reason you can get 19 lbs of CO2 from a single gallon of gasoline (~6.3lbs) is because only the carbon (the "C" in CO2) comes from the gasoline. oxygen, the "O" in CO2, comes from the air via the intake manifold of the internal combustion engine. when gas burns, the carbon and hydrogen separate, the hydrogen combining with oxygen to form water. the carbon combines with oxygen to form CO2. carbon has an atomic weight of 12, oxygen has an atomic weight of 16 and CO2 therefore has an atomic weight of 44 (12 from carbon, 32 from oxygen). a gallon of gasoline is roughly 87% carbon and 13% hydrogen. therefore the amount of carbon in one gallon of gas is (6.3 x .87)=5.5lbs. to calculate the amount of CO2 produced by a gallon of gasoline, you multiply 5.5 x (44/12), which is over 19 lbs of CO2. you can check these figures out for yourselves, and since it IS science, the answer is a fact. so, you are welcome for being accurate with my figures. hopefully, now that bush is gone, science will be back in vogue. which is good, since i am an engineer.
any one remember[read?] Huxley's "brave new world"?? any one see any relationship to that classic, with it's srtuctured classes, somma, and feelies?
the solution to our dilemma is simple--
provide free somma and feely passes
with each "fuel fill" at the pump.
signed: GERRY MANDER
The single most effective strategy to start with is to reduce consumption, through conservation and efficiency. A gas tax (of more than 2 cents) would certainly help.
Okay, now that the rant is over, there is a very simple solution: end NAFTA. 70% - 80% (depending month to month) of imported foreign oil comes from Canada and Mexico, not the scary Middle East as we were brainwashed into thinking a decade ago. (notice how the rhetoric used to be oil from the Middle East, but now has changed to foreign oil. Most people have come to equate foreign oil with that from the Middle East) Along with many other wrongs, NAFTA subsidizes Big Oil.
Now that we (America) have had the sticker shock of $4+ gasoline, and it is now heading below the $2 level, it is the perfect time to end the oil subsidy. It is already known that when fuel prices rise significantly, Americans scream for alternatives. Let them compete on even ground with no subsidies. It might be painful for a time, but the cream will rise to the top without taxpayers money. If you like one idea or another, you can then use your own money that wasn't stolen through taxation to invest.
However, it will take significant risk, fortitude, and most importantly will power.
As for the NG debate, every county in America has a stockpile of the stuff. Every landfill is a source of NG (Methane). Waste Management already uses NG powered trucks to collect trash in some states. CAT and DEERE are both working on their own versions of NG engines. Several emerging technologies are coming online to help speed up the break-down process converting refuse into fuel(s). There will soon be a day where landfills are mined for their resources.
fran: i read "brave new world" so long ago i cannot remember somma and feely passes...but i think i catch your drift.
kunst: oh, i agree completely that we will, as you say, HAVE to get along with less. in addition, in my opinion, we face economic and social ruin if we don't prepare for this day, with a comprehensive, long-term, strategic energy policy:
thefitzman.blogspot.co...
certainly conservation and efficiency is a part of such a plan, and is stated in "STEP 2: Conservation" of my plan...after "STEP 1: Acknowledge the Problem", which is where i fear we will regress to now that oil has dropped (albeit short-term) under $60.
CW Man: thanks for the kind words., thanks also for the typo correction. not sure if i did that or the SA editor, anyhow, most people that read my stuff know these energy symbols in their sleep.
Third Party Guy: i hate labels..they are so unhelpful. but if you want to label me green, it is a label i wil be glad to wear. instead of "stealing" your tax dollars like Bush has been doing for the past 8 years, please note the tax i am recommended would bypass Congress and go directly to jobs and infrastructure to make America more energy dependent and KEEP our money at home rather than sending it to countries that hate us. if this is green, then it's green for MONEY, which will be staying HERE. what happened to free market capitalism and enterpreneurship? it died with the bush administration. the US is now totally Fascist, with a Kaptial "F". and i am not "crying" about it, i am trying to educate you because you obviously have fallen victim to the government and media so that you think only the gasoline powered car is sufficient for you. THINK MAN, THINK. Nafta is not the sole problem here. Mexican oil production is dropping rapidly due to depletion rates and lack of investment in infrastructure. Canada has high cost tar sands. do you really want the US to hang our future oil supply on that? get real dude. i am all for stopping the subsidies to oil companies and it is the first real point you have made. so, then, after banging me for trying to get nat gas solutions in place, you end with telling me how much US nat gas is available. i can't follow your logic at all.
wizard: good point on the totals as i left out part of what is included in "STEP 3" of my energy policy, is that gasoline taxes increase over time. 2 cents this year, 4 next year, etc. now, according to my calculations, the US uses 390,000.000 gallons of gasoline per day (EIA data), which correlates to $7.8 million dollars a day of revenue, or, 2.8 billion dollars per year. that builds alot of natural gas infrastructure! also, this is not the only source of funds...gas guzzler taxes as well as income from natural gas taxes, etc. etc. we need to get creative. if we just took half of the money bush is spending in iraq and on the bailout, we wouldn't need iraqi oil and could buildout *everything*. we have to start somewhere.
"...the tax i am recommended would bypass Congress and go directly to jobs and infrastructure to make America more energy dependent..." - I assume this is a typo and you meant to say independent.
Perhaps you missed my pseudonym, but I am far from a victim of the government and media. I realized during the Clinton administration that Capitalism was being dissuaded, but I agree that the Bush administration has driven the nails in the coffin.
And perhaps I put you too much on defense by lumping you in with "Greens" that you missed the point of my comment. Everything you are wanting to do, Infrastructure, solar, NAT vehicles by restoring the tariffs on oil. In you response to me you are correct that I don't want to pay the rising cost for depleting Mexican (truly worldwide) oil and expensive tar sand (and shale) from Canada. By restoring the tariffs on oil, which is another form of subsidy, and the price of oil rebounds to $100/ barrel, alternatives will be competitive without their own subsidy. As a taxpayer, I am tired of taking the risk through subsidies and other programs, while someone else reaps the benefits (or at least no loss).
Further, I was not bashing you for wanting to get NAT solution, rather I was pointing out that there is already a foundation on which to build. Waste Management only uses NAT trucks where state/local laws mandate it. Imagine if every state mandated the refuse haulers were to use NAT trucks, how long would it take for the infrastructure to get in place? There would be a demand and some entrepreneur would jump at the opportunity.
My point is we do not need any new taxes for your wish list to happen. Unnecessary taxation in thievery, and your idea is unnecessary. Further, I believe your idea, " put a $0.02/gallon "green tax" on gasoline with provision that this tax bypass Congress", would require a Constitutional Amendment. But why should we start following that outdated piece of paper now, because not following it has led us to unsound money, wars, exporting jobs, and corporate welfare (among other things) hasn't it?
3rd party: yes on the typo, thanks. the foundation for natural gas powered transportation has been around for decades. it is simply a *policy* matter. nobody wants to pay any taxes, yet no one seems to understand that the deficit that bush has rung up are simply crushing and yet, we have absolutely nothing to show for it. my suggestion is a mere $0.02 tax, which no one will even notice now that gas has dropped below $2/gallon (from over $4...), and, the US and its people will actually GET something for it. i am certainly NOT in favor of doing anything unconsititutional...an... who has read me knows that i was in favor of impeaching bush in his first term for doing exactly that. i am afraid you took my words too literally. what i was proposing is for congress to pass legislation such that this tax is NOT thrown into some general spending fund, but is *specifically* tied to the expenditures that i itemized.