> 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, when Salvador Allende became President of Chile in the early 1970s and nationalized Chilean copper mining, the US dumped >250,000 tons of copper from its strategic reserves onto the world market, crashing the price, in a (quite successful) attempt to destabilize the Chilean economy, which was heavily reliant on copper exports. Of course when that still didn’t lead to Allende’s downfall, plan B was a CIA-sponsored military coup.
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.
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.
Why not both? Gives a better reason for the Saudi's to go along with the plan. They help the US political side and get paid in political good will and getting to damage the US competitors.
Hello, there's a fairly warm little proxy war going down right now in Ukraine and an increase in Russian forces in Syria. The 80's were the nice hopeful bit.
A bit of both. I wouldn't characterize as being quite so malicious, but it's business for sure. The Saudi's need to maintain market share, even if they are selling it cheaper. They're banking on the price going back up, and if it does and the world has switched to US suppliers, then they're out even more.
But there's another country they're looking to disrupt, one who's primary source of income is through oil sales due to sanctions. Their biggest enemy.
From my understanding the dump was started from financial companies that had loads of oil sitting around in tankers and the Saudis then followed and met the price, but didn't set it.
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.
I Googled this yesterday thinking the same thing, but the real increases in production came from Iraq (nearly doubling yearly output) and the extra US production. Saudi Arabia didn't seem to have any substantial change in production. Maybe I'm wrong, but that's what I found.
Politically, if Saudi Arabia can't be counted on to fix prices when faced with a threat like Russia and Ukraine, then why does the US keep them as an ally, since they're clearly involved with terrorism?
Saudi Arabia has only added about a million barrels per day during the supposed attempt to weaken US frackers.
By contrast, the US added about three million barrels per day in three years ('12,'13,'14).
Most of the oil price damage was caused by the dollar. Oil had been running at significant global oversupply for years before the dollar began to crash the price back in June/July 2014. That same dollar effect threw Canada into a recession, cut Australia's growth rate in half, and crushed emerging markets including Brazil.
Long before Saudi Arabia boosted production, the dollar took off on its greatest run in decades. Oil immediately began to crash from there forward.
The USSR also collapsed due to the strong dollar 30 years ago, which dropped the price of oil substantially. Oil went from $140 inflation adjusted, for three years, to plunging off a cliff to $35 or so, courtesy of Volcker's strong dollar move. And then again Russia nearly imploded during the cheap oil days of 1997-2000, also caused by an extremely strong dollar (gold hit around ~$250).
Oil contracts and futures are priced in USD. This is what the phrase "Petro-dollar" refers to. And this is why everyone needs a big slug of dollars in their respective reserves - to buy oil. This scheme as been pretty good for the US, but other players are not quite so enamored with it.
When the dollar is strong, it takes fewer of them to buy a barrel of oil. ITT there is a lot of talk about the production side of the equation, but the effect of the strong dollar and weaker Chinese demand have played a role too.
China is talking with Russia, Saudi Arabia and Iran about RMB denominated contracts, so that'll be fun. Currency risk will have to factored into contract prices.
"And this is why everyone needs a big slug of dollars in their respective reserves - to buy oil."
This petrodollar conspiracy is baffling.
Countries don't hold dollars solely to buy oil.
The oil and gas industry is only about 4.6% to 6.5% of the global economy.
Countries hold reserve currencies to manage the exchange rate of their currency. Petrodollar conspiracists would be well served by learning about foreign exchange reserves: https://en.wikipedia.org/wiki/Foreign-exchange_reserves
And in any case, only 65% of foreign currency reserves are in the USD.
OK. So let's just truncate all of that and directly answer the question by saying that when the dollar is strong it takes fewer of them to buy any particular amount of a commodity that is priced in dollars.
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.
It's certainly not beyond conception! As Assange mentioned in this interview, a wikileaks cable showed how the US departments all work together to achieve a Foreign Policy aim, for example when a a country needs to be isolated by the they work together to apply pressure in the economic, diplomatic, military and public relations realm.
No, nothing wrong with that, but there is sometimes a perception that there is some competition between the branches of government, or a conflict of interest.
> US departments all work together to achieve a Foreign Policy aim
My interpretation wasn't that they're working together, i.e. coordinating, more like acting in unison where they are each given a different pressure-point to attack suited to their innate abilities or field. So a central goal would be established at the highest level and you give a task to each entity that can contribute in their own separate ways to that goal - e.g. a newspaper leaks something that will destabilize something. An NGO will support a particular group with food, AID, legal advice, protection. A diplomat will call in some favors.
They're all doing different things with different effects that will hopefully contribute towards the greater goal, which would also explain how things can go pear-shaped if it doesn't all lock together into a cohesive outcome.
Saudi Arabia has its own interest in crippling the Iranian economy further. If we're looking at a geopolitical goal beyond Saudi's own need to keep oil cheap to undermine renewables and U.S. shale oil, that would come way before the American desires to undermine Russia. Saudi Arabia is strongly allied with the U.S. but doesn't feel particularly threatened by Russia.
the US dumped >250,000 tons of copper from its strategic reserves onto the world market
Do you have a source with more details? 250,000 tons of copper doesn't really sounds like much. Wikipedia says annual WW production is 18M tons, so the US dumped 1.4% of one's year production on the market. Sure, enough to depress prices, but for how long? It would seem like you'd need to keep dumping over a long period of time otherwise the price would dip for a few months, then recover.
That’s today, which seems to be about 3x higher than in ~1970.
Overall (according to google sleuthing) the price of copper was down by about 25% in 1971–1972 compared to 1970.
Keep in mind: (1) Copper made up something like 2/3 of Chile’s exports at the time, so every incremental price drop was a severe blow; (2) The US simultaneously cut Chile off from international credit and aid; (3) The CIA helped organize industrial sabotage, protests, strikes, etc., so there was also some disruption to Chilean production at the time.
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 equilibrium price because of the cost of storage and interest, but it should be close.
But this does work in practice - it basically describes OPEC's current strategy, and perhaps relates to Starbucks' ongoing market strategy, etc.
The price may return to the equilibrium price at some point, but the single seller is able to hold it low for as long as they have reserves to dump. If other sellers are dependent on sales, then they must compete.
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.
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.
The price of any commodity is the price at which the marginal unit clears. Given that production tends to be very inelastic and planned a long time in advance, in the short term it can be pushed around quite dramatically.
It's also not at all easy to work out who's supplying what in such a giant market.
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.
Drive down to the port or rail yard in your town. Notice the tanks used for wholesale petroleum product distribution. The distribution system needs to be in motion at all times. Flooding it with supply demands a faster liquidation of the product.
It doesn't permanently go down. But if that single seller is selling at way under the previous market price, that is what everyone is going to be paying until they run out of their supply. If this lasts long enough, it could be enough to drive entities dependent on copper production out of business or into a collapse as the price they are forced to sell at isn't profitable. Once that point is reached it doesn't matter if the price goes back up when the single seller runs out, the damage has been done.
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?
Canada has had a strategic maple syrup reserve since 2000. It hit the news when someone stole $30000 worth of the sweet stuff from it.
It's basically there to both protect Canada's domestic syrup producers and extend the sales market internationally.
You can bet your tuque that the reserve would be put into play if New England syrup producers made a move that might hurt the Quebec producers across the border.
"""
The Federation of Québec Maple Syrup Producers (three magical elves) noticed that the syrup was missing during a routine inspection of the warehouse, which is maintained as part of the world's "global strategic maple syrup reserve."
"""
> 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.
You may have heard the phrase "two wrongs don't make a right."
Because what's fair for most, is not fair for the gorilla. The USA dominates the world in so many ways, when it takes action it is viewed very differently than when, say, Sweden takes action.
Maybe leadership in those countries should take that into account before proudly declaring themselves against US interests, nationalizing US wealth, blocking US ships, kidnapping US citizens, proxy warring against US allies, exporting terrorism, spreading anti-US propaganda, radicalizing its citizens to be anti-West, etc. Jesus man, the US isn't some charity, its a nation with its own self-interests and it will move to protect those interests. Not to mention, its obligations of defense in regards to being part of NATO and its post-war relationships with Korea and Japan and Israel.
Also, its a moral hazard, and frankly stupid, to make non-US nations above criticism just because they're small. Assad is mass murdering his people in Syria, for example. He deserves that criticism, and more.
Hell, Allende's downfall had everything to do with running a radical administration hell bent on nationalizing everything and pissing off business owners, the workers, congress, and the military. Of course, people like you shout, "OMG THE USA OVERTHREW HIM... somehow" and here we are. Sadly, this is further anti-US propaganda. Allende dug his own grave yet the US gets the blame. It is possible to be disliked by the US and also be a domestic fuckup on a level where your own people get rid of you. How nice to always have someone else to blame for your troubles.
Criticizing the USA isn't the same thing as being its enemy. Blocking unfair USA policies in their sphere is the right of any nation. The alternative? Rolling over whenever the USA says Boo!?
The USA, for its part, needs to then be very circumspect in who it steamrollers and when. Not because it can't get away with it; because its wrong.
There's no shortage of conspiratorial comments and posts about Russia and China on HN either. There's something about conspiracies which captures our imagination but there needs to at least be some basis in the facts.
Of course China is buying now. Oil is cheap. Good time to stock up.
The price of oil is not conspiracy driven at the moment. It used to be, back when OPEC had more control. Now that everybody has fracking technology, supply exceeds demand, and OPEC can't do much about the price.
For an overview of OPEC (mostly Saudi) thinking on this, see [1].
When my Uncle worked out in China about 15 years ago, a local dignitary was giving him a tour of the local area.
He noticed what looked line capped oil wells in the fields. When he asked what they were the official confirmed that they contained oil, which "we will only start using once we can't buy anymore from anyone else".
I've never heard of China having their own oil fields so I assume that there was something lost in the translation but regardless, it was an interesting insight into the Chinese psyche.
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."
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 lot of environmental benefits. I would bet if oil stayed over $120/barrel for several years the economic incentives would kick in and someone would find a way to make hydrogen cost-competitive, probably even eventually bringing the cost down so it's similar to current oil prices.
The US tapped out its highest-profit traditional oil wells a long time ago, and used the export profits to grow its economy. Now the US is awash in fracked gas.
The "sit on it" strategy assumes that the resource held in reserve will not become obsolete. It makes more sense to me to pull it all out of the ground as fast as you can, so you can sell more of it when the global price is highest, rather than being forced to buy at that time.
Didn't China learn anything from its rare earths play? The supply curve never really hits a brick wall. As long as the price keeps going up, the market keeps producing more to sell. And even if you hit a hard limit, such as by exhausting all the cheap wells and mines, human ingenuity often produces an acceptable substitute.
Many countries are burning the petroleum as fast as they can, keeping the computers running for the engineers researching wind, solar, nuclear fission, geothermal, hydrogen, fracking, cellulose enzymes, algae oils, nuclear fusion, radioisotope thermal, external combustion engines, generator-electric hybrids, fuel cells, denser batteries, more efficient motors and transmissions, and a whole host of other technologies that will finally be ready to take over, once the last oil on Earth is being burned by China to keep its lights on and tractors running.
Everyone else will be running their tractors with fuels mixed up from agricultural waste, and keeping the lights on with a dozen different competing technologies.
It seems like a bad strategy to me, but I'm not Chinese.
After China became practically the sole supplier of rare earth elements to the entire world, they restricted exports in 2011, creating shortages everywhere outside of China.
It caused a lot of companies to reexamine their supply chains, this time considering factors other than just price per ton. Several nations started subsidizing domestic production from mothballed facilities for strategic economic reasons. China went from 95% share of that market to less than 80%.
Essentially, they were expecting to get higher prices by restricting output as a monopoly supplier, but it blew up in their faces.
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.
This is the same strategy the US pursued after WWII. Secretary of the Navy James Forrestal was a major proponent within the Truman administration of encouraging private American development of sources in the Arabian Gulf in order to preserver American production for use in a future war in the event we could not secure foreign supplies.
> “Periodically when caverns are empty you can actually shoot sonar images of the caverns,” says Corbin. “And that gives you a three-dimensional way of looking at them.” Some have interesting shapes, he adds. The outline of one chamber, for example, would resemble a large flying saucer.
Mm yes this is a conspiracy theory waiting to happen
Not entirely related to the US supplies, but did this stand out to anyone else?
> The facility at Shibushi, for example is just off-shore. Following the catastrophic earthquake and tsunami which struck Japan in 2011, calls were made to expand the country’s oil stocks in case of crises in the future which might hamper oil distribution again.
One of the most volcanically and tidally affected and nautically food-dependent nations on earth thinks it's a good idea to hold millions of barrels of oil on their coastlines?!
China is aggressively trying to do the same thing, attempting to boost their storage to 500m barrels, and buying a lot of oil right now while it's cheap (something the US should be doing, to further bolster its 700m barrels):
"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.
It's an insurance and once it is really needed it will be worth more than all dollars combined.
In my opinion the amount of stored oil is ridiculously low with about 8 days of world oil consumption. It can only be used to iron out minor hiccups on the world production or to power the US military and US emergency food supply for some time. Is this reporter telling us that this little safety measure isn't worth that amount of money?
I think it would make sense to compare the barrels with US demand and not global demand. I couldn't find a good recent estimate of US oil demand. Wikipedia says it was ~18M/day in 2011. That would mean about 40 days of reserves, which is pretty good, IMO.
We (the United States) produce around 9 million barrels per day, and could produce more if necessary. We import a bit more than 7 million barrels per day.
We wouldn't need to replace domestic production, so the strategic reserve would cover about 100 days of lost imports. But there are few if any scenarios where we'd lose all imports -- most likely we'd lose access to only a small fraction of imports, and even that kind of shock would spike prices and thus our consumption would drop and domestic production would increase -- so the reserve can be expected to last far more than 100 days. (If we are ever in a situation where it seems plausible the reserve might be exhausted, e.g., a major global war, then extreme conservation measures will be enforced, and the discussion changes state.)
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.
Strategic reserves can absolutely also be used as an offensive economic weapon, however. As one example, when Salvador Allende became President of Chile in the early 1970s and nationalized Chilean copper mining, the US dumped >250,000 tons of copper from its strategic reserves onto the world market, crashing the price, in a (quite successful) attempt to destabilize the Chilean economy, which was heavily reliant on copper exports. Of course when that still didn’t lead to Allende’s downfall, plan B was a CIA-sponsored military coup.