Strategic oil reserves must be used to bring down the price.
US President Joe Biden has released 50 million barrels of oil from the US strategic oil reserve. The aim is to depress the rising price of oil. Those 50 million barrels of oil are equal to what the US economy consumes in 60 hours. The total US strategic oil reserve is 600 million barrels, a reserve that was created after the oil crises of the 1970s. Other countries are also releasing part of their strategic reserves. For the United Kingdom, it is 1.5 million barrels, for India 5 million barrels. In response to this news, oil prices rose. This seems strange, but the news had already been discounted in recent weeks. Speculation that strategic reserves would have to be tapped in order to push down the oil price was already rife, so the news did not come as a surprise. It was possession of the thing, end of the fun. In light of the just-concluded climate conference, this action could perhaps be seen as a special step, which is partly why Biden waited until the conference in Glasgow had ended. A gift for Thanksgiving.
About 2 million barrels a day more are being consumed than produced at the moment. Every day, worldwide oil stocks are falling. Earlier, Biden had asked OPEC to increase production, but without result. The power of OPEC plus Russia (OPEC+) has increased due to its rising market share, also helped by the tight market. OPEC+ will meet again on 2 December. The cartel has previously agreed to increase production by 400,000 barrels per day each month. It is possible that the release of part of the strategic oil reserves will give OPEC+ reason to pause. The Americans are still trying to prosecute individual cartel members under the banner of NOPEC (the No Oil Producing and Exporting Cartels Act). American politics has been trying to break the power of the OPEC cartel for 20 years. Under NOPEC, it is possible to confiscate cartel assets in the US. For example, the largest oil refinery in the United States is owned by Saudi Arabia. NOPEC was also one of the reasons why Qatar left OPEC. Qatar has just invested USD 10 billion in an LNG project in Texas. Furthermore, history shows that it is precisely this oil cartel that is difficult to break up.
In addition to strategic oil reserves, there are also commercial oil reserves, and these are currently very low. Worldwide stocks are 200 million barrels lower than pre-corona. At the same time, refining margins remain high, which makes it attractive for refineries to continue operating at full capacity. Rising oil prices and rising refining margins signal strong demand. However, oil companies are remarkably reluctant to invest, prompted by ESG pressures from various quarters related to the energy transition. Despite these social pressures, the demand for oil is increasing. In the statistics, the energy transition is invisible. We are already at about a hundred million barrels a day, roughly equivalent to the pre-Corona peak. And the world economy is still not fully open. The demand for oil is still rising because of strong economic growth.
The release of oil reserves does not change the dynamics in the oil market, the irony is that total stocks are falling even faster, and it is precisely the falling stocks that are causing the price of oil to rise. Until now, this could be cushioned by drawing down on stocks, but this is finite. The recent success of OPEC+ is even causing more discipline within the cartel, which has often been a problem in the past. There will come a point next year when world oil production is at maximum capacity and demand nevertheless exceeds supply, something that has not happened since oil production began some 150 years ago. Only an agreement with Iran and the massive start-up of US oil fields could provide temporary relief in the short term. The fact that there is still insufficient investment is dangerous. After all, it is not a simple on/off switch. There are often many years between the investment decision and the final production.
Despite the rise in oil prices, we now spend only a fraction on energy compared to the 1970s. This also means that the pain threshold for the western world with regard to oil prices is still much higher, then the oil price can easily reach $200 per barrel. The spare oil production capacity is now about 3 to 4 million barrels a day, and it is mainly located in the Middle East. Next year, the world economy will open up further and normally the demand for oil will increase in line with the growth of the world economy. That will no longer be possible with a world economic growth rate of 5 percent in 2022. Moreover, a real opening means more air travel, which requires a lot of oil. Furthermore, oil production was affected this year by exceptional weather conditions, but these may not be so exceptional in the future due to the changing climate. The only solution is to accelerate the energy transition, but to produce and install all those solar cells and wind turbines, a lot of oil has to be consumed first. Compared to many other assets such as houses, the stock market, and even gold, oil is extremely cheap at USD 80; again, an oil price of USD 200 per barrel would be more appropriate.
