The US government owns a bunch of physical barrels of oil.
And as part of the tentative budget deal reached on Tuesday, the government will sell about 8% of this stockpile over the next decade.
Between 2018 and 2025, the government will sell a total of 58 million barrels from its Strategic Petroleum Reserve, or SPR.
The current budget draft also gives Congress the ability to ask for an additional $2 billion worth of sales between 2017 and 2020 to improve the SPR itself.
Readers who follow markets closely have probably already wondered why the government is doing this with oil prices at multi-year lows.
The answer, of course, is politics.
The SPR was established in 1975 after the oil crisis of the early 70s saw prices spike as supplies were cut off from some import partners in the Middle East. The reserve can hold up 713.5 million barrels of oil and currently holds around 695 million barrels. The oil is stored in the Gulf of Mexico.
And so the “strategic” part of this reserve is that it was designed to protect against future domestic economic shocks inflicted by international trade partners. It is, as Matt Yglesias at Vox writes, a tool of geopolitics.
Now, for the finance-minded reader, the government’s decision to sell oil now is embarrassing. Oil prices are down about 60% from where they were a year ago and the decline in prices has been largely attributed to an influx of supply form US shale oil producers.
As many have said, the world is “awash in oil,” meaning there is too much supply. And so obviously, the US government’s sales won’t help this situation. The sales may, in fact, make the supply issue worse.
The government is not, however, selling that much oil. OPEC, or the Organization of Petroleum Exporting Countries, a 12-member oil cartel of which Saudi Arabia is seen as the de facto leader, produces about 30 million barrels per day, for example.
But the decision to sell oil now looks silly, because no one who has been investing in oil since 1975 – which the US government sort of stumbled its way into doing – would choose this as the moment to sell down roughly 10% of their position.
As New River Investments’ Conor Sen noted last night, though, that the SPR would be sold down as part of this deal is classic “socionomics.” And by this I take Conor to mean this is another example of lawmakers doing things market-minded people think (nay, perhaps know) are outright foolish.
- REUTERS/Jonathan Ernst
The US government, of course, is not an investment fund. It’s a government.
But the decision to sell now looks extremely foolish and naive when seen through a certain lens.
Bloomberg’s Joe Weisenthal, for his part, called selling down the SPR now instead of, say, simply borrowing money (at super low interest rates) to fund the government “completely insane.” Which, again, is the right reaction if one considers the US government a profit-seeking participant in the world’s oil market.
This is sort of up for debate.
Yglesias, for his part, asked a more roundabout question on whether we should be worried about the government’s judgment on selling down assets – the way we would with an investment manager, for instance – given that the idea the government is turning anything into a profit is sort of strange since the government itself decides how much money to print and so on.
The point is that the government had a bunch of oil which it held in a strategic reserve.
The “strategic” part was for purposes of say, a war disrupting our ability to import oil, not the government’s need to meet a budget that was being held hostage for silly reasons like the debt ceiling.
But here we are.