60 Million Barrels of Strategic Reserve Oil Won't Solve the Problem

Includes: COP, CVX, HES, MRO, OXY
by: Michael Fitzsimmons

The International Energy Agency (IEA) announced 60 million barrels of oil will be made available to the worldwide oil market via releases from "strategic" stockpiles. The U.S. government will do the heavy lifting by releasing 30 million barrels (one half the total) from the U.S. strategic petroleum reserve (SPR). The SPR is currently near full capacity at 726.5 million barrels.

It is no coincidence this announcement comes as QE2 winds down, and after Ben Bernanke's speech Wednesday. Last November I wrote an article explaining why QE2 would not work. Why it would lead to a lower U.S. dollar and higher oil prices. We now know, without a doubt, that QE2 did not work. We have a lower dollar, higher oil prices, interest rates at 0%, a moribund housing market, and high unemployment. Surprise surprise. As I have stated many times:

We cannot solve a commodity problem (oil) with monetary and fiscal policy!

Thursday's announcement is a tacit admission the above statement is true. As the talking heads on CNBC said repeatedly - the Federal Reserve is "out of bullets." News flash - the Fed never had bullets. All they had was a printing press and a bunch of people working in absolute secrecy and without Congressional oversight feeding it ink and paper. All this printing of money out of thin air could have been prohibited by Congress. The country would have been forced to scale down its militaristic ambitions and would have been forced to deal with its most pressing economic issue: its dependence on foreign oil. Instead, both problems have gotten much worse as a result of the Fed printing money to "pay" for our wars and our oil.

Another news flash: releasing oil from the SPR will also not fix the oil crisis! Please consider this: 60 million barrels is only 75% of the oil worldwide consumption burns in one DAY. After 30 days, then what? Look, here's the long-term problem:

We are in an era when worldwide oil supply will have much difficulty keeping pace with worldwide demand!

This means much higher oil prices. Period. This means the world is now on an oil based economic yo-yo. Oil prices go up - economies contract. Oil prices come down. Economies then grow but oil prices go back up again. Ad infinitum. This is where the world is today. Each downturn leads to more and more debt and more governmental financial hijinx to cover up the real problem: oil. For a country like the U.S., which is the world's largest oil consumer and imports close to 60% of its petroleum, this is a huge problem.

With that as background, does the IEA and the U.S. government really believe this 60 million barrel release is the best long-term solution to the "oil problem"? Of course not. No serious energy policymaker believes it. It is a political jesture only and at most will serve to cover up the failed QE2 policy of the Fed.

The only solution to the "oil problem" is to switch to another energy source. Since the U.S. is the world's biggest oil consumer, and 70% of U.S. oil consumption is in the transportation sector, it is then logical to conclude that we must replace gasoline. It is also true that natural gas is the only domestic fuel that can be scaled up to signficantly reduce foreign oil imports (by say 5,000,000 barrels a day within 5 years). It's cleaner, cheaper, and abundant - so what's the problem?

The oil companies are fighting natural gas transportation. Why? The endgame to the oil crisis combined with the current lack of a strategic, long-term, comprehensive energy policy in the U.S. will be nationalization of American oil companies. How else will the U.S. government deal with the high unemployment, social unrest, and unraveling of a society based on cheap gasoline?

Exxon Mobil (NYSE:XOM) is now producing more natural gas every day than oil. XOM produces more natural gas in the U.S. than any other company. Why not take the lead in the natural gas transportation revolution? Because the profit margins on oil and gasoline are higher than on natural gas. So much for the patriotism of American energy companies.

Speaking of natural gas, it appears as though the U.S. government will allow the natural gas producers to make the same mistake the coal industry made: widespread toxic destruction of U.S. fresh water resources. Apparently, Congress thought it was an excellent idea to exempt shale gas producers from clean air and clean water regulations. Wonderful. So, instead of natural gas being a blessing the country can rely on to reduce foreign oil imports, create jobs, and enable an era of prosperity few can even imagine given today's oil crisis economy, we won't use natural gas for transportation and will destroy our fresh water in the meantime.

It seems the U.S. will make any and every mistake possible when it comes to energy policy. One would think 2008's $145/barrel oil and near $5 gasoline would have changed things. One would hope the financial meltdown and the resulting economic contraction would have changed things. One would hope the country and its policymakers are too smart to allow widespread destruction of freshwater resources. But, as we found with Obama, "hope" seems non-existent in the United States these days. Nothing has changed from the Bush days.

What's an investor to do? Buy gold & silver because the U.S. dollar is toast. Buy U.S. oil producers like Occidental Petroleum (NYSE:OXY), Hess (NYSE:HES), Conoco Philips (NYSE:COP), Chevron (NYSE:CVX), and Marathon (NYSE:MRO) whose spin-off is imminent. Also, since an oil crisis meltdown of the U.S. currency and economy will make these investments moot, you might want to get on the horn and talk to your Senators and Congressmen and tell them you won't vote for them unless they:

  1. Support Natural Gas Transportation
  2. Support Environmental Regulation of the Natural Gas Shale Industry

Disclosure: I am long COP, MRO, HES.