This week, we celebrated our nation’s independence, and we continue to celebrate the spirit that has kept this nation alive. That spirit has been building and supporting our nation for 241 years. The spirit I’m writing about here is entrepreneurialism, and it’s worth fighting for. US entrepreneurs have built expansive industries that create incredible products, and helped built our nation. Entrepreneurs like Edwin L. Drake, who drilled our nation’s first oil well on August 27, 1859, in Titusville Pennsylvania helped to bring about the dawn of a new world. Other entrepreneurs built pipelines or built transmission lines to transport energy, the lifeblood of our American economy. Other entrepreneurs took chances on a tiny salt dome known as Spindletop Hill, and on January of 1901, the well produced a geyser of oil, reaching 150 feet and produced nearly 100,000 barrels of oil per day. This one formation gave birth to companies like Gulf Oil, Texaco, and Exxon.
Those bold men needed the same entrepreneurial spirit in others to create a free and open market trading system to deliver and market crude oil from Spindletop to others around the US, and eventually the world. As our appetite for energy grew, we needed to globalize the energy trade to meet the needs of our petroleum-thirsty nation.
Unfortunately, globalization has brought about a new set of threats to our domestic economic stability. These threats are known as geopolitical threats and they promise to disrupt free and open trade from one nation to another. Threats like ICBM missiles being launched from the North Koreans, or the Russian actions near Alaska, bussing US airplanes in near international waters. Even the continued destabilization in the Middle East contributes to the risk that is developing within our energy markets. Remember, as risk increases, so does risk premiums, and we’re seeing those premiums increase daily.
In the commodity world, risk is a “four-letter word” because it is, for the most part, driven by market fundamentals, like the risk associated with a hurricane in the Gulf of Mexico, most of the time it’s temporary, but always serious. It ebbs and flows like the ocean’s tide. It creates havoc on hedging programs while providing a bit of sport for speculators. Risk, as a component of price, is harder to define numerically as it increases because it pops quickly into a market. It is easier to identify once the threat subsides and market prices normalize, but this happens slowly.
What concerns most analysts today is what the actual price will be once these fundamental risk factors go away. Will there be a much lower price point? Add to that, the concept of rebalancing supply and demand in the oil market. If our markets reach the equilibrium price point, and risks go away, our crude oil price should plummet. However, if crude oil supply and demand do in fact rebalance and one of these geopolitical risk factors happens, we could see prices back around early 2014 levels when the price was near $100 per barrel all over again.
What Keeps Our Markets Free and Open
Since WW II, we developed a tremendously advanced and powerful US Navy, not to just fight wars, but to keep the trade lanes open that provide for free and open trade around the world. According to Col. Baron Lukas, USMC, Retired, a former fighter pilot and current CEO of an innovative crude oil services company, “As an outgrowth of the Bretton Woods Agreement, the US Navy assumed the task of keeping peace on the high seas. Since the end of the Second World War, our Navy and Marines have kept the seas open for free trade and free from aggression.” Today, we need our military, more than ever, as we examine the global energy complex. We’re seeing geopolitical risks threatening the transportation of crude oil, liquified natural gas, (LNG), and refined products like gasoline and diesel fuel, especially in the Middle and Far East. Geopolitical issues from the other side of the world are threatening our energy independence here in the US and that threatens us all. Increasing the production of crude oil lessens threats to the US economy simply by reducing our need for foreign oil. Higher US production keeps our economy’s life blood flowing unmolested.
Strategic Petroleum Reserves
It is important to understand that the US is not prepared for huge price spikes in crude oil, gasoline and diesel; our economy is just too fragile to take that kind of economic shock. This brings us to the US’ only safety net, the Strategic Petroleum Reserves (SPR). The SPR was established in 1975 in response to the threat that was created by the Organization of the Petroleum Exporting Countries (OPEC) oil embargo. That embargo nearly crippled our nation economically in 1973 and 1974.
The crude oil stored in the SPR on the Gulf of Mexico, near major refineries, provides a buffer for the US economy in the event we have either a geopolitical threat that blows up or another terrorist attack, like we saw in 2001. As a matter of fact, just after the 9-11 attacks in 2001, President George W. Bush ordered the SPR to be filled to its capacity of approximately 700 million barrels, saying, “The Strategic Petroleum Reserve is an important element of our nation’s energy security. To maximize long-term protection against oil supply disruptions.”
The threat of disruption from any one of the issues mentioned above would spike prices to astronomical levels, because according to the US Department of Energy, the SPR can only supply about 4.4 million barrels per day to our nations refineries. With refinery runs at 17.141 million barrels per day and US production of 9.338 million barrels per day, the US still needs 3.433 million barrels per day to meet refinery needs and that keeps us functioning for only the next five months.
There will always be natural threats from hurricanes, tornados, lightening and so on, but we’re not prepared to manage a geopolitical risk that could result in a substantial disruption in crude oil supply and transportation. Any one of the several risks that are priced into the market could threaten distribution chains around the world, resulting in substantially higher prices.
We’re seeing tensions rise from the North Koreans against, well, just everybody except China. The Iranians are working closer to having a functional nuclear program and now there are real troubles between many OPEC members, namely the Saudis, Bahrain, the UAE, Egypt and Qatar and Iran, or even the Russians and Syria, as reports abound that the Assad regime is preparing another round of chemical attacks on its own people. What a mess! If any one of these threats develops into a full out exchange, we’ll be in a lot of trouble.
Read More from Crudefunders
- Who Is OPEC and Why Do We Care?
- OPEC Appears To Be Delivering On Production Cuts, So Why Aren’t Prices Rising?
- When Times Get Tough in the Oil Patch, Amazing Things Can Happen…
- Crude Oil Production & Supply: Have We Made Any Actual Progress in A Year?
- Innovators Make a Difference in Oil and Gas!
- Geopolitical Risk and Its Effect on the Price of Crude Oil
- What Can We Learn from Crude Oil’s First Quarter Report Card?
- Crude Oil: What is the Future
- How Crude Oil Prices React to Geopolitics
- Prices at the Pump Are Rising: Is It Seasonal or Something Else?
- Is Ethanol Worth the Fight?
- What Are OPEC and the Saudis Up To?
- Energy Independence: Why US Crude Oil and Natural Gas Matters
- Crude Oil and Market Psychology
- Crude Oil: A Technical Analysis
- Crude Oil: Technical Analysis II
- Crude Oil: What’s Really Dragging Prices Down
- The Real Culprit of Low Crude Prices: Oil Demand
- Is OPEC Imploding?
If you want more information on the energy markets and what is making prices move every day, go to our website www.crudefunders.com and scroll down to where it says “Subscribe”. There you will find our link to the daily commentary “Energy Wise”, a comprehensive piece that includes both fundamental and technical analysis of the day’s energy markets and provides you with the detail that you need. For more on Energy Economist Tim Snyder and his company, go to www.matadoreconomics.com.
Read Next
