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Oil Games Don’t Hold Down Prices or Prevent Hyperinflation

July 1, 2011

E.J. Manning

In an attempt to drive down oil prices, the U.S. and other oil-consuming nations released 60 million barrels of oil from their reserves, with 30 million barrels coming from the U.S. government-owned reserve. They hoped that by flooding the market with excess supply, they would cause an artificial forced liquidation of oil futures contract holders who bought using leverage.

The U.S. Strategic Petroleum Reserve is the world’s largest government-owned stockpile of emergency crude oil reserves. maintained by the U.S. Department of Energy. It holds 727 million barrels of oil reserves at four different sites along the Gulf of Mexico. Considering that the U.S. is releasing 30 million barrels of oil from these reserves, the nation has reduced the size of the national emergency reserve by 4.1%.

After Obama’s decision was announced on June 22nd, crude oil prices fell as much as $5.71 per barrel from $95.41 per barrel down to a low of $89.70 per barrel on June 23rd. Oil prices declined slightly more during the next two trading days, reaching a low this past Monday of $89.61 per barrel and closing Monday at $90.61 per barrel. However, oil prices have surged again as greedy futures contracts holders play their own profit game ahead of the holiday. Oil prices recovered the entire price drop that came after Obama’s decision was announced.

It was hardly worth jeopardizing homeland security by reducing the emergency oil reserve by 4.1% to see a $4 reduction in oil prices that lasted for only 3 days. If the White House had any faith whatsoever in Bernanke’s assertion that rising oil prices are only transitory, there would be no reason to release 30 million barrels of oil from our emergency reserve. The rising oil prices we have experienced so far is far from an emergency. The emergency will come soon when the world turns its back on the U.S. dollar and the nation sees a rapid decline in purchasing power on those terms alone. The emergency could well be here when the U.S. can no longer import oil from foreigners at any price because of hyperinflation. The nation could be forced to live with only the oil produced in this country.

Consider this scenario. China has the power to set off the economic equivalent of a nuclear bomb. China can at any time announce that they are no longer going to buy U.S. treasuries. If they decide to invest in gold, the price of gold would double overnight, with the U.S. dollar immediately losing half of its purchasing power. The yuan would then skyrocket in purchasing power, automatically giving China the world’s largest economy with the Chinese GDP soaring past U.S. GDP. There would be a massive rush out of the U.S. dollar with our trading partners unwilling to export any oil to us.

The United States produces only 5.5 million barrels of oil per day, but consumes about 19.3 million barrels of oil per day. This means the U.S. currently needs to import 9.2 million barrels of oil daily, as all that national wealth leaves the nation forever. Crude oil stockpiles are around 359 million barrels, enough to last for 24 days without domestic production, assuming a national panic doesn’t ensue. In the event the U.S. is cut off from oil imports because of hyperinflation, the nation would be forced to live off of our own oil production of 5.5 million barrels of oil per day. The commercial stockpiles would be gone in 39 days.

Without an emergency oil reserve, after a period of just 39 days, farmers won’t have enough oil to produce food, manufacturing plants won’t have enough oil to process and package food, and logistics companies won’t have enough oil to get finished food products into supermarkets. This is why the nation has an emergency oil reserve, to prevent store shelves from becoming empty in our supermarkets due to a fuel shortage.

It takes 13 days for oil from the emergency reserve to begin entering the market and once it does, the most it can add to the market on a daily basis is 4.4 million barrels of oil. In a crisis the nation must first use only commercial stockpiles for 13 days, which would cause the commercial reserve to decline to 239 million barrels of oil. Beginning on the 14th day of a crisis, 4.4 million barrels of oil per day can come into the market from the emergency reserve with 4.8 million barrels of oil per day entering the market from the commercial reserve. After 50 additional days, the national commercial reserve would be depleted. That would give the nation 115 more days to withdraw 4.4 million barrels of oil per day, but the U.S. would be forced to reduce daily oil consumption by 33% during those 115 days. This is based off of an emergency reserve of 727 million barrels of oil. With Obama this month prematurely releasing 30 million barrels of oil from the national emergency reserve, the nation actually has 108 days where the U.S. will be able to consume 2/3 of its normal oil consumption, after 63 days of full oil consumption.

The Federal Reserve’s QE2 has printed $600 billion out of thin air allowing the nation to continue without the need for any adjustments. If it wasn’t for the Federal Reserve working tirelessly, Americans would be cutting back on oil consumption and oil prices could decline. National wealth would not be fleeing the country because of oil. While the free market doesn’t really exist anymore with the incessant leveraging of contract futures, falling oil prices after an initial crisis of confidence would make it easier for Americans to live with the real unemployment rate of 22.3%. The crisis of confidence is what politicians are really afraid of.

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