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Posted by Michael Carr | Sep 19, 2022 | Chart of the Day, Markets
2 minute, 30 second read
Supply and demand determine prices.
This has been true for thousands of years.
Yet politicians seem to believe they can repeal the laws of supply and demand.
The latest example is in the oil market.
I touched on this last week when discussing supply chain disruptions.
Global governments decided to release oil from strategic reserves to ease price pressures.
Strategic reserves should provide oil when global emergencies interrupt supply.
Governments created them after oil embargoes in the 1970s led to deep recessions.
The U.S. holds up to 714 million barrels of oil in its Strategic Petroleum Reserve.
When prices rose after Russia invaded Ukraine, the U.S. announced plans to sell 180 million barrels over six months.
That’s an average of 1 million barrels a day, about 5% of the amount used in a typical day.
Other nations agreed to release another 60 million barrels to meet 0.33% of global daily demand.
Strategic reserves are down by about a third since the beginning of the war.
Source: U.S. Energy Information Administration.
This has a minimal impact on energy prices.
Treasury Department economists estimate it lowered the price of gas as much as $0.42 per gallon.
That amounts to about one-third of the drop in prices since the June peak.
While any price reduction is welcome, the Treasury estimate uses some generous assumptions.
The impact of the reserve releases might have been closer to $0.10 a gallon.
Taxpayers will have to pay that back in the long run.
They may pay back much more than that.
The oil came from strategic reserves.
It’s in the nation’s best interest to hold those reserves and replenish them.
That will require buying more oil.
The oil that was sold carried an average cost of less than $30 a barrel.
Replenishment prices will be at least 100% higher.
Plus, the government doesn’t have the money to buy oil.
This requires debt.
Taxpayers will pay interest on the debt.
Bottom line: Lower gas prices are nice.
But the costs of this program are high.
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Michael Carr is the editor of True Options Masters, One Trade, Precision Profits and Market Leaders. He teaches technical analysis and quantitative technical analysis at the New York Institute of Finance. Follow him on Twitter @MichaelCarrGuru.
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