Following up on our oil point last week, US Social Security isn't the only US government reserve looking rather low.

The Strategic Petroleum Reserve (SPR) - the government oil storage facility - is still in a very depleted state. After releasing a record amount after the Russian invasion the emergency oil supply is now below 380M barrels having fallen from over 700M barrels before the war.

In fact, as we mentioned last autumn, the SPR is at its lowest level in four decades, which is both notable and concerning in an era where energy is routinely used as a geopolitical weapon.

Here is a dramatic chart. The blue line is the current level over time, the red and green is the times when oil was drawn down or added etc.:

As you can see, the drawdown of over 200M barrel of crude was unprecedented and possibly warranted but it leaves the US very short of oil. And when the government had an opportunity to reverse the drawdown by buying oil back at their own price target but they simply did nothing.

What to say about this?

We honestly are not sure. Overall, the situation is completely confounding. In 2022, the current administration, to their eternal credit, did what we didn't think they couldn't do:

They sold oil when it was high in price and had the opportunity to refill government storage facilities when it was low.

It was truly impressive.

It is hard enough to sell high and buy low when you are a nimble (and financially incentivized!) private market actor. The government with endless competing interests and clumsy competing political prerogatives makes it double so.

We were not the only doubters out there and, unlike some perhaps, we could not be happier to have been proven wrong. Luck may have played a part but so what, that evens out over time and isn't a disqualifying event.

And yet rather than refill government storage tanks when the price of crude had reached the price target ($67-72) that the government had arbitrarily set, they did nothing.

Even more bizarrely, the government seem unprepared and caught off guard when the price of oil reached that price level and people began asking about the plan. This might be the most head scratching aspect of all this. What exactly did they expect would happen?

Energy Secretary Jennifer Granholm said that the process to refill the reserve could "take years" and might only begin at the end of this year.​

Further they claimed that they were not ready to take deliveries yet because of long planned upgrades to the storage facilities and so had to hold off making any purchases.

But to be frank, none of this makes any sense. You can make purchases now and take deliveries later. That is EXACTLY how commodity future markets work.

This isn't just unimpressive it is very puzzling. We searched and searched this week for a smarter (or simply more creative!) mind to help explain this lack of action and came up pretty empty.

There seems to be one of two possibilities:

1. Either this is simply a gamble that, regardless of what OPEC+ or Vladimir Putin or the global economy does, oil prices will stay low.

2. Or the Biden administration believed sending money to oil firms, even at the price point of their choosing, was political non-starter and distasteful.

Here is what we would say about both these possibilities.

The first is simply reckless. As the OPEC+ group has just clearly demonstrated, you are not the only player in the global energy market and there are simply too many unknowns and contributing factors to be able to predict the price successfully let alone consistently in one direction. This would be a scary amount of hubris even for the Biden Presidency.

The second is less reckless but in some ways worse because it might indicate both a shocking amount of naïveté and the sort of muddled thinking that has plagued a lot of other Biden policymaking. It might be less scary but more sad, in other words.

Buying oil in the private market is not going to be green at any price. That is a very unpleasant fact but it is equally unpleasant that your economy uses a lot of fossil fuels, every day and that fact isn't going to change any time soon.

Not refilling the SPR doesn't change the oil dependency one bit. No one out there is buying an EV because we have less of an oil cushion.

Further, the fact that oil is dirty doesn't mean there are not real socio-economic benefits to refilling the SPR. High energy prices will quickly raise inflation - which hurts everyone, Republican and Democrat alike. Further, spending more on energy is hugely regressive which means it hurts the poor more than the rich. Minorities, defined almost anyway, will certainly be also worse affected. So, the risks are both real and skewed towards the political communities that the Democrats claim to represent.

Once again, this is puzzling. Perhaps it is beyond puzzling and simply irresponsible but the most frustrating aspect of this is simply:

If you had refilled the Reserve you could have performed this trick all over again! Buy low, sell high!

Regardless of which of the above is more likely - and we would vote for the second - it is less irrational and more ideological which fits with the bizarro world we have inhabited as part of the age of The Great Forgetting. This is a very dangerous game to play.

Energy prices may stay low perhaps because we get lucky (again) or because economic activity does well and truly slow meaningfully or a combination of the two but we have wasted a prime opportunity to de-risk the threat of high energy and also, perhaps most importantly, prove Big Government's critics very, very wrong.

Think about how sweet that would have been! What a missed opportunity to keep critical newsletter writers everywhere at bay and eating humble pie.

Lastly, there is increasing evidence that one of the reasons that Saudi Arabia quickly got the OPEC+ (the "+" stands for other countries like Russia, Mexico and Nigeria) to agree to production cuts was the US comment that it had no plans to swiftly fill its reserve.

This isn't the first time this newsletter has pointed out that playing to a domestic audience (for unclear reasons?) can have consequences internationally and it is beyond foolish to expect otherwise. This was a message from the Saudi coalition to the US that, yet again, we do not operate in a vacuum.

In fact, just on oil this is, by our count, the third time we have had to make this point. That isn't great, especially because this newsletter is only a few years old......

Part of good government is planning strategically and thinking domestically AND internationally and weighing the probabilities. What is absolutely infuriating is that in this case both the domestic priorities and the OPEC+ interests were aligned with filling the reserve. Once again, simply confounding.

We fervently hope that energy prices stay low and the US government - under any administration - never wastes a golden opportunity to "buy low, sell high" as they just have but we are very skeptical and have suggested preparing for higher oil prices in 2023 is now wise.

We would love to say that perhaps the silver lining will be that the government will learn for its missed opportunity but that seems an even crazier than trying to explain why they didn't simply refill the reserve in the first place.

The driving season in the US is here in mere weeks....

*******

Have questions? Care to find out more? Feel free to reach out at contact@pebble.finance or join our Slack community to meet more like-minded individuals and see what we are talking about today. All are welcome.