Tapping Oil Reserves Won’t Cure Trump’s Gas Pain
(Bloomberg Opinion) -- Besides Twitter — especially of the ALL-CAPS variety — President Donald Trump has another way of influencing troublesome oil prices: the Strategic Petroleum Reserve (SPR). The question is which is more influential.
In theory, those 660 million barrels stashed at four sites along the Gulf Coast should count for more than 280 characters in the ether. But if the aim is to push down pump prices ahead of midterms, then the SPR is both a blunt and not necessarily effective tool.
Many competitive House races where gasoline prices could weigh on voters’ minds are in the Midwest (see this for a detailed analysis of 60 congressional districts). Pushing down pump prices there would require at least one of two things: sending more gasoline into the region, or suppressing oil prices.
Crude oil released from the SPR (or from anywhere) has to be refined to be useful. And this is where an SPR release would run into its first challenge.
The SPR would be pushing extra crude oil onto refiners running flat-out already; mainly to produce distillate, where inventories are low.
As a result, they’ve also been producing a lot of gasoline; stockpiles sit slightly above the seasonal average. Meanwhile, the increase in pump prices has slowed demand growth sharply. In short, there is no shortage of gasoline:
This matters because, in order for barrels to be drawn north from the Gulf Coast — either as finished gasoline or crude oil for local refining — there has to be an incentive for refiners to do so. There isn’t one.
If anything, the Chicago area is increasingly producing surplus gasoline, says Zachary Rogers, a refining and oil products analyst at Wood Mackenzie. He points to an increasing volume of gasoline seeking an exit out of the Midwest to East Coast markets as evidence of this. That shift has already sparked a tussle in Pennsylvania over plans to change the direction of flow on part of a key pipeline running between Philadelphia and Pittsburgh.
It also seems unlikely Midwestern refiners would pull much more crude oil up from the Gulf Coast; they prefer using cheaper barrels from the Bakken shale in North Dakota or, better yet, heavily discounted oil from Canada. A sophisticated mid-continent refinery with a coking unit — think BP Plc’s Whiting plant near Chicago — would earn a theoretical margin of about $27 a barrel using West Texas Sour crude oil, according to Bloomberg data. Their margin on Western Canada Select would be $37.
This reflects, and has encouraged, a broader shift in the U.S. oil system toward more barrels flowing from north to south and pipelines being adjusted to accommodate it. At this point, anyone trying to shift more crude oil north from the Gulf Coast could struggle to find pipeline capacity to do so.
Besides physical flows, the other way the SPR could influence things is by depressing oil prices. Even this isn’t a slam-dunk.
The last notable release was in 2011, as Libya erupted. In early June, reports that then-President Barack Obama was considering tapping the SPR began pushing oil prices lower; a formal Notice of Sale for 30 million barrels was issued on June 24. By the end of September, Nymex oil futures had dropped by 20 percent. Midwest gasoline prices fell by just 11 percent, however.
Instead, roughly half the benefit accrued to refiners:
In a report published this weekend, energy economist Philip Verleger pointed out 2011’s SPR release was too little and too late to help consumers against higher gasoline prices; they fell later in the year, but in the context of weaker demand.
If an SPR release succeeded in pushing crude oil prices lower this summer, it’s tough to see why a large portion of the savings wouldn’t also end up in refiners’ pockets.
An added complication is that, since 2011, the U.S. ban on crude oil exports was lifted. Given the current physical constraints on shifting barrels north or refining more of them, it's a fair bet at least some of those SPR barrels would simply head overseas. That's especially so because some other barrels would likely just shift into commercial storage, widening the U.S. discount to international markets.
In theory, if a real crisis sent oil soaring — Iran? Venezuela? Both? — the president could consider even more radical moves, such as a temporary ban on crude oil or even refined product exports. (Crazy? Perhaps, but have you read any news lately?)
These would generate their own whack-a-mole responses, though. Without the export outlet, refiners and oil producers would simply dial output back, removing supply. Republicans could also risk political blowback in states like Texas, where drivers aren’t the only constituency affected by oil’s gyrations. Plus, while trade controls might appeal to Trump’s protectionist instincts, they wouldn’t do much for that whole “energy dominance” thing.
Tempting as it is to tap the SPR, it may ultimately make little difference to a driver in Minnesota or Michigan. And if 2011’s experience is any guide, even that impact could take several months to unfold and then prove fleeting. In normal times, this would be an argument for holding off. In 2018, it might just spur a bigger release, and within weeks.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Liam Denning is a Bloomberg Opinion columnist covering energy, mining and commodities. He previously was editor of the Wall Street Journal's Heard on the Street column and wrote for the Financial Times' Lex column. He was also an investment banker.
©2018 Bloomberg L.P.