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Why the US stores 700M barrels of oil underground

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Re: Why the US stores 700M barrels of oil underground

#41

Post by ghshephard »

Scarbutt wrote: post #38
retube wrote: post #21

Earlier quoted context omitted.

Sorry but that's nonsense. It's a well known and indeed publically admitted strategy by the Saudi's to drive US shale producers out of business. Google "saudia arabia united states oil price" for many authoritive hits on the subject. Russia was collateral damage.

Come on, are all those US shale producers really that dumb? they knew that if they started flooding the market they just wouldn't be able to compete, the U.S doesn't care much about all those small shale producers when it has bigger fish to fry.

"Small Shale Producers?"

We're talking about 49% of total US crude oil production.

http://www.eia.gov/tools/faqs/faq.cfm?id=847&t=6

Re: Why the US stores 700M barrels of oil underground

#42

Post by Scarbutt »

ghshephard wrote: post #41
Scarbutt wrote: post #38

Earlier quoted context omitted.

Come on, are all those US shale producers really that dumb? they knew that if they started flooding the market they just wouldn't be able to compete, the U.S doesn't care much about all those small shale producers when it has bigger fish to fry.

"Small Shale Producers?" We're talking about 49% of total US crude oil production. http://www.eia.gov/tools/faqs/faq.cfm?id=847&t=6

"Small Shale Producers" are the ones that go out of business, of course, the big ones can hold up.

Re: Why the US stores 700M barrels of oil underground

#44

Post by TheCowboy »

lukeschlather wrote: post #27
stephen wrote: post #14

Earlier quoted context omitted.

Charlie Munger has mentioned the same "use theirs first" approach: "The imported oil is not your enemy, it's your friend. Every barrel that you use up that comes from somebody else is a barrel of your precious oil which you're going to need to feed your people and maintain your civilization." http://seekingalpha.com/article/1631292-charlie-munger-think...

The disingenous (or ignorant) thing about that sort of thing is that it makes no mention of alternative fuel prices. Coal and natural gas can be refined into gasoline. This is obviously not a great idea from an environmental standpoint, but from a cost standpoint it becomes economically viable when oil hits about $70/barrel. Electrolysis-refined hydrogen becomes economical when oil hits $200/barrel, and that has a lo…

It seems more than optimistic to put the cost at $70/barrel for coal liquefaction, and it makes me question the validity of the source. It's an energy intensive process that is usually seen as much higher than $70, and the alternative economic uses of the energy used in production are usually going to be better.

Not only do you still have to spend energy mining and transporting coal, but the energy spent refining the coal is immense compared to what refinable products you get out of it.

There is also market evidence where people are more willing to put their money into technological development of fracking than liquefaction.

It's best to be suspicious whenever a source suggests that coal liquefaction, and other processes like it, are that simple. A good book on the topic is Oil 101 by Morgan Downey.

Re: Why the US stores 700M barrels of oil underground

#45

Post by IkmoIkmo »

mediumdeviation wrote: post #15
jacobolus wrote: post #8

> But there’s an important line to draw between that and using an SPR for ad hoc manipulation of the world’s markets. On this point, Martin Young is emphatic: “The oil stocks are not there for price management as such,” he explains, “they’re there to correct a shortage in the market because of a supply disruption.” Strategic reserves can absolutely also be used as an offensive economic weapon, however. As one example…

That's interesting, but how is any commodity able to have it's price pushed down by a single seller dumping from a fixed reserve? If the market notice that the extra supply is coming from a fixed reserve, then they'd rightly be able to infer that at some point the supply will run out, and prices will return to market value, which would in turn drive up prices again. It probably won't go back to the previous equilibri…

Indeed, that's interesting. For example, for oil, the US has an annual cost of $0.2b for storing about $44b worth of oil i.e. a 0.45% annual cost. You'd expect if the reserves are dumped for an entire year for example, that smart investors would be happy to start paying a 0.45% annual cost once the price drops by slightly more than that. At 5-10% at such a scale, despite other price fluctuation risks, that's already a significant arbitrage opportunity that would generate enough buying power to put a floor under a small price drop.

That having been said, the US actually ran a planned long-term programme for oil storage. But if someone suddenly floods a market, there probably isn't infrastructure and expertise to immediately seize that as an arbitrage opportunity. If it happened every few years then there'd be tons of cheap storage, if it happens once every few decades, then sudden gluts probably dump the price with little capacity for investors to immediately buy back in. And this is coincidentally a few years short of derivatives taking off on a big scale, Allende died the year of the Black-Scholes model, which would've made everything more frictionless and easier to invest and trade in for the various parties (producers, investors, storage, buyers etc)

Of course it wasn't the only factor, it may have dropped prices by a few percent and that's already very significant. Remember that a lot of US employees and advisers left the country after the copper industry was appropriated, replaced by people with very different backgrounds and no experience to manage these companies. I've seen some sources that said the price of production went from 20 n something cents to 40 n something cents, while the price on the market was something like 49 cents. Profits were squeezed hard. Combined with sanctions on Chile (much of Chilean copper went to the US, Europe and Japan, big allies who could impose quotas and tariffs), a small price drop due to extra copper flooding the market and similar issues in other markets, could and indeed did create layoffs, economic woes and friction in Chilean society.

Re: Why the US stores 700M barrels of oil underground

#47

Post by refurb »

jameshart wrote: post #37
refurb wrote: post #29

Earlier quoted context omitted.

it basically describes OPEC's current strategy Not really. OPEC's strategy is one of production. Based on their reserves, OPEC could keep it up for decades. If you're dumping a strategic reserve, it has a limited time span and likely the market can estimate how long since the reserve was public info.

OPEC's strategic reserve is also kept underground - just where they found it.

True, but OPEC's reserves are measured in decades of production, not like the US reserve. Unlike the US reserve, OPEC's strategy is not quite as time constrained.

Re: Why the US stores 700M barrels of oil underground

#48

Post by wil421 »

WaltPurvis wrote: post #25

Two quick comments: "Hides" is a stupid word. It's not hidden; it's well-advertised. The reporter calls it "expensive" because it costs $200m/year. That's not expensive, that's ridiculously cheap insurance; it's surely one of the most cost-effective government programs in existence. (I stopped reading at that point.)

It was a clink baitish title. Looking at the title I'd assume it was all about the US hording oil. In fact, they mentioned several counties and stated it was common for larger countries to keep reserves.

The title is trying to bash the US and capitalize on the US hating going on right now.

Re: Why the US stores 700M barrels of oil underground

#49

Post by drzaiusapelord »

Spooky23 wrote: post #35
jacobolus wrote: post #8

> But there’s an important line to draw between that and using an SPR for ad hoc manipulation of the world’s markets. On this point, Martin Young is emphatic: “The oil stocks are not there for price management as such,” he explains, “they’re there to correct a shortage in the market because of a supply disruption.” Strategic reserves can absolutely also be used as an offensive economic weapon, however. As one example…

Well, yeah. They are "strategic" after all, which is a word that is meaningful in the global political sense. Consider that strategic weapons are the ones that could destroy life on earth.

This. I don't know why people think the US should be in love with every anti-US regime and any attempt to hurt that regime is suddenly "OMG EVIL USA" when we see the same realpolitik everywhere else without protest. Most well off nations have strategic reserves of things, offensive trade policies, protectionist economic policies, etc that can be used offensively. How many sanctions, targeted import taxes, bans, and tariffs and such are active right now between nations? Hundreds? Thousands? Tens of thousands?

Re: Why the US stores 700M barrels of oil underground

#50

Post by drzaiusapelord »

Shivetya wrote: post #10
jacobolus wrote: post #8

> But there’s an important line to draw between that and using an SPR for ad hoc manipulation of the world’s markets. On this point, Martin Young is emphatic: “The oil stocks are not there for price management as such,” he explains, “they’re there to correct a shortage in the market because of a supply disruption.” Strategic reserves can absolutely also be used as an offensive economic weapon, however. As one example…

I am not beyond believing that the current gutting of oil prices was done at the US's behest to damage Russia. It wouldn't take too much in the way of guarantees to Saudi Arabia to have them swamp the markets. Far more effective than military intervention.

This is fairly conspiratorial. SA was looking at all this fracking and realizing fracking could easily invalidate its oil wealth. All it has is oil wealth. If the regime wants to survive it must compete with fracking. I'm not sure why this is suddenly a surprise as HN and other popular sites have had fracking articles for years and those articles specifically mention the threat fracking is to SA's oil wealth. That's on top of the upcoming electric car revolution, which is very much depress oil prices futher as demand plummets. And that's on top of China's oil demand going down as its slowing down its mega-building projects and entering an economic slowdown.

It probably doesn't help that Putin is messing around the mideast and trying to get all sorts of oil/gas pipelines running through it. On top of Putin cozying up to Iran, which is SA's regional rival. I imagine there's a realpolitik angle here and probably a dozen other angles, but the idea that the US called up SA and made them drop prices solely to hurt Putin laughable. Putin is already hurting Putin by forcing sanctions on himself with his various annexations. Even without the oil drop, Russia's economy would still be in the shitter. They can't get the loans they need to beat the recession that's been brewing for years. They can't modernize their economy, can't diversify, etc. They scared off foreign investors with their annexations, civilian targeting, corruption, and nationalization of wealth. What country did the founder of VK flee to, for example? The oil price drop is just the icing on Putin's incompetence.

The ruble is now 0.015 US Dollar, which is half its historic price. We didn't get here by oil price drops alone. Putin is digging his own grave here, and by proxy, the Russian people's.

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