US shale producers and OPEC ready to talk

(May 26)After a bruising recent fight, now ended, in which Saudi Arabia pumped more and more oil to drive shale producers out of business, US oil shale bankers came to Vienna this week and top OPEC oil officials are planning a trip to Texas.

The US shale producers are trying to see if they can co-exist or if they will begin another major fight in the near future. US shale oil production has increased supply as OPEC along with a number of OPEC countries have cut production to raise prices. Khalid al-Falih the Saudi Arabian energy minister said that the OPEC and the US shale producers had to learn to coexist. Al-Falih reversed Saudi policy last December pushing through production cuts. On Thursday OPEC and several non-OPEC countries led by Russia agreed to extend the cuts a further nine months to March 2018. This keeps roughly 2 percent of world production off the market.

However, these supply cuts combined with higher prices enable the shale industry to gain higher profits. The Saudi squeeze had made the industry search successfully for ways to reduce costs to survive. In the largest US oil field the Permian Basin, Parsley Energy (PEN), Diamondback Energy (FANG.O) and others are pumping faster than they have in years, as they take advantage of new technology, lower costs, and the steadier oil prices caused by OPEC actions.

OPEC recognizes the global effect of shale production but has decided to keep just enough oil on the market to keep prices below $60 dollars per barrel. Noureddine Boutarfa who represented Algeria at the Vienna meeting said: "All shale companies in the U.S. are small companies. The reality is that at $50 to $60 a barrel, (the U.S. oil industry) can't break beyond 10 million barrels per day." This would be a one million bpd increase after a two-year price war with OPEC that saw scores of bankruptcies and layoffs. OPEC hopes that this increase will not be sufficient to offset rising demand. The increased production will also be offset by declines in production in traditional oil fields.

Iran's oil minister, Bijan Zanganeh, showed some optimism in the situation:"For all OPEC members, $55 (per barrel) and a maximum of $60 is the goal at this stage. So is that price level not high enough to encourage too much shale? It seems it is good for both."

At previous meeting there was reluctance to talk about shale production but not this year. Carlos Perez, oil minister of Ecuador said:: "We had a discussion on (shale) and how much that has an impact. But we have no control over what the U.S. does and it's up to them to decide to continue or not." Mark Papa, chief executive of Permian oil producer Centennial Resource Development was asked by OPEC delegates to give a presentation on shale oil's potential production but apparently did not indicate exactly what OPEC could expect.

Some in OPEC are skeptical about the potential for further oil extraction. Dave Purcell of Tudor, Pickerig Holt and Co a US shale investment bank who attended the meeting said: "OPEC looks at shale and it scoffs. There's a rational skepticism globally, but it misses the mark." OPEC will meet again in November to evaluate output policy. Most members appear to accept that the US shale industry must be accommodated but others still see another market battle in the future. Nigerian Oil Minister, Emmanuel Kachikwu said: "If we get to a point where we feel frustrated by a deliberate action of shale producers to just sabotage the market, OPEC will sit down again and look at what process it is we need to do."

The OPEC cuts have pushed oil prices back above 50 dollars a barrel although as I write this it is now marginally below 50 dollars. It has helped some producers who rely heavily on oil revenues. The decline started back in 2014. However, it is also helping US oil producers which are not part of the agreement. This slows down the OPEC attempts to balance the market. Global oil supplies are still near record highs. Trump's budget proposal to sell have the US strategic reserves over ten years also is a threat to attempts to reduce excess supply.

Many had been hoping that OPEC would make even deeper cuts and oil prices dropped at first with the announcement of the further nine months extension of the present cuts. As BNN reports: "Oil prices edged back up on Friday after a five per cent fall in the previous session on disappointment that an OPEC-led decision to extend current production curbs did not go deeper." Saudi Arabia's Al-Falih noted that there were suggestions that there should be deeper cuts but that this would not be necessary. Libya and Nigeria were excluded from the cuts because of unrest that curbed their production. He also said that Saudi Arabia's exports would decline sharply from June on, helping to speed up rebalancing of the market. OPEC's goal is to bring oil stocks down from a record high of 3 billion barrels to their five-year average of 2.7 billion.

Al-Falih said: "We have seen a substantial drawdown in inventories that will be accelerated. Then, the fourth quarter will get us to where we want." OPEC does not want the price higher than $60 dollars a barrel as this could result in a substantial increase in US shale production. The US now rivals Saudi Arabia and Russia as one of the world's largest producers. Al Jazeera reporter, Sonia Gallego, reporting from Vienna, said: "although [US shale production] has evolved from what it was years ago - it has had to cut back and reinvent itself - the Saudis have maintained that that level of production is not going to affect OPEC." US oil production also may find itself contracting as reserves dwindle and also through reaction to the negative consequences for the environment and health arising from fracking

Oil prices may begin to decline again

Gulf oil platform

As the number of U.S. oil drilling rigs is rising and Canadian production from the oil sands begins to come on line again after recent fires, the price of oil is beginning to fall. Oil prices were down 3 percent on Friday.​ It appears that weekend profit-taking in Brent and US crude futures also helped drive prices down. Brent's front-month price was down $1.41 at $50.54 a barrel. West Texas Intermediate (WTI) fell $1.49 to $49.07. This is the largest drop since early April.

For the entire week, however, Brent rose 2 percent and WTI about one. Crude futures are also almost 90 percent higher than the 13-year lows during the winter as supply disruptions in Nigeria, Canada, Libya, and Venezuela drove prices up. Prices had earlier gone down to below $30 dollars a barrel.

In the US, drillers added three oil rigs in the week up to June 10. In the previous week, nine rigs had been added. Tariq Zahir a trader in WTI futures said: "This looks like the beginning of a trend that will translate to the slowing down of U.S. crude production declines. I'm adding to my short positions in spreads." Scott Shelton, energy broker with ICAP in Durham, North Carolina said that the rise in rig counts so far will not significantly change the supply of crude.

The price of oil has almost doubled from the lows reached in the middle of January this year. Brent rose above $50 a barrel and stayed there. WTI has risen considerably as well. While there have been serious disruptions of supply in Canada and Nigeria and little production in Libya that helped eliminate the oil surplus, Canadian production is already beginning to come back on line. Production in the US has just risen for the first time in three months. In spite of the outages, the IEA still sees global inventories as rising through August. Any improvement in the situation in Nigeria or Libya could see prices fall further.

For the longer term, new discoveries off the coast of Newfoundland may further add to production already coming from the nearby Hibernia field. Statoil, the Norwegian oil company, claims a 19-month drilling program discovered oil at two location in the Bay du Nord area in the large Flemish Pass area. Statoil says that it appears that reserves at the Bay du Nord side were likely at the lower end of the estimated 300 to 600 million barrels. Paul Fulton, president of Statoil Canada said: "The recent drilling program has been critical to Statoil's continued assessment of Bay du Nord and work is underway to evaluate the results related to proceeding with a potential Statoil-operated development in the Flemish Pass Basin".

International Energy Agency predicts oil prices to continue low in 2016

Experts at the International Energy Agency (IEA) said a continuing glut of oil will keep prices low and prevent them from rebounding until next year.

Just a year ago the IEA, the Paris-based group of 29 major oil importing nations, had projected a relatively fast recovery. Instead, prices have continued falling even below $30 a barrel, the lowest level since 2003. Today the price is up somewhat but still just about $33 a barrel, with Canadian oil being even lower.

The head of the IEA, Faith Birol, said "extraordinary volatility" in oil markets make forecasting what will happen quite difficult. Legendary predictor Jim Gray predicted last December that oil would fall below $30 a barrel and stay there. He was right that it fell below $30, but for now it is above that level. However, Birol said, in the IEA report released Monday: "Our analysis of the oil market fundamentals at the start of 2016 is clear that in the short term there is unlikely to be a significant increase in prices."

Birol expects Canadian output to be more than 5 million barrels a day, as projects approved years ago still continue to come online. Even though some companies are operating at a loss on each barrel produced, no major shut-downs or closures have been announced yet. However, expansion is quite another matter. In the oil sands in particular, companies are in no mood to expand given the low prices of oil. The IEA expects crude output to slow considerably once approved expansions are complete.

Given the increasing production, oil supplies have grown over the last three years. Oil prices have dropped by 70 percent since 2014. As a result, gasoline prices have also declined. In the U.S., the U.S. Energy Information Center forecasts an average price of just $1.98 a gallon on average for the year. This is the lowest average price since 2004.

The IEA reported capital expenditures on exploration and production declined by 24 percent last year and was expected to drop another 17 percent this year. This will be the first decline of two years in a row since 1986. Alberta has been worst hit by the decline in oil prices.

Last year alone, Alberta lost 19,600 jobs, the most since 1982. Cold Lake is a prominent oil sands hub, where as much as 500,000 barrels a day is produced. Oil majors such as Cenovus, Imperial Oil, Husky Energy, and Canadian Natural Resources have operations in the area, which also features a Canadian Air Force base. The town has been hard hit by the postponement of many oil sands projects.

The mayor of Cold Lake, Craig Copeland, estimates 1,000 out of 5,000 working directly in the oil fields are out of work in the Lakeland area of 40,000 people. Copeland noted that there was a time from 2012-2014, when you were unable to get a room in Cold Lake, but now parking lots are empty. The decline hurts local business serving the oil industry. Construction workers from across Canada are sent home. Restaurants and hotels lose more and more business. Statscan reports that the unemployment rate in the Wood Buffalo/ Cold Lake are went from a high 8.6 percent in December to 9 percent in January this year. Even a year ago the rate was 5.4 percent. Copeland worries that because of the decline in oil prices, lack of pipeline capacity and climate-change policy, that the oil sands production will no longer grow. He is concerned that oil sands production could freeze at present levels causing the Cold Lake area to decline further.

A Petroleum Labour Market Information labour demand report for the area projects a 92 percent lower demand for onsite construction workers by 2018, or 20,000 fewer jobs compared to 2014. Operations jobs will improve modestly but still far below 2014 levels. While the decline in oil prices has hurt Alberta the most, Saskatchewan too has been hard hit as described in this article about Estevan billed as the Energy Capital of Saskatchewan, south of the actual capital Regina,

US economy stars at Davos meeting

Davos - Usually emerging economies star at the annual World Economic Forum in Davos Switzerland. This year talk is about the superior performance of the U.S. economy compared to that of most other developed countries. + Add Image Russia is entering a recession due to sanctions but mostly because of the decline in oil prices that in turn has caused the value of the ruble to drop. India is struggling with economic reforms. Even China is growing more slowly. The U.S. on the other hand, in the fourth quarter of 2014 grew at an annual rate of 5 percent. Jacob Frenkel of JP Morgan Chase and Co said : “The U.S. is now regaining its position in the world economy. It is the place where the recovery took hold in the most robust way.”

The Davos meeting runs from January 21-24. The US will have a high profile at the meeting as Secretary of State John Kerry will attend. Kerry is the highest level official the Obama administration has ever sent to Davos. Often at the meetings there will be talk of pending and possible takeovers. This year many investors are looking to invest in the U.S. Merck CEO Karl-Ludwig Kley said: “If you want to participate in innovation, you have to be in the U.S. No country on earth is investing as much in innovation.” This interest in the US extends to many countries. Last May Japanese distiller Suntory paid out $16 billion for US distiller Jim Bean. Even Canada got in on the act with Encana paying $5.9 billion for Athlon Energy in Texas. Also, Qatar's sovereign-wealth fund joined other investors to buy half of American Express's business travel unit.

Some analysts warn that the performance of the U.S. should be put in perspective. China overtook the US in 2014 as the world's largest economy. While the US economy is predicted to expand by 3.2 percent this year, China is set to expand by 7.1 percent down from the 7.5 percent projected last June. Last June, the world economy was predicted in Global Economic Prospects to be 3.4 percent but is now set to be 3.0 percent. The US growth rate has been revised upward but China is still expanding at a much faster rate. The full Global Economic Prospects report for 2015 can be found here.

 The following paragraph summarizes much of the outlook for the world economy: "While activity in the United States and the United Kingdom has gathered momentum as labor markets heal and monetary policy remains extremely accommodative, the recovery has been sputtering in the Euro Area and Japan as legacies of the financial crisis linger, intertwined with structural bottlenecks. China, meanwhile, is undergoing a carefully managed slowdown. Disappointing growth in other developing countries in 2014 reflected weak external demand, but also domestic policy tightening, political uncertainties and supply-side constraints."

 Lower oil prices will impact negatively on countries such as Russia, Venezuela, Iran and to some extent Canada. but will help countries such as China and India who need to import a great deal of oil. The stronger US dollar may hurt US exports along with decreased demand as growth in many countries remains sluggish.

Oil prices rise for seven days straight on supply worries and Iran

Oil prices have risen for an entire week now. This is the longest rally since January 2010. Sanctions against Iran are also now threatening global oil supplies as well.


Oil futures rose to the highest level in nine months. Some favorable economic news in the U.S. and improvement in consumer confidence in the U.S. France and South Korea could mean higher consumer demand.

Gene McGillian a U.S. based analyst and broker said:"The bulls have the oil market by the throat," "There's an undercurrent of fear about the Iranian nuclear situation and what that will mean for global supplies as people scramble to replace Iranian barrels." Crude for delivery in April rose 31 cents to 108.14 a barrel. Contracts reached the highest level since last May 5.

April Brent oil added 9 cents to $123.71 a barrel on the London-based exchange. While downside risks from economic slowdown are receding somewhat at the same time worries about disruption of oil supplies is increasing driving prices up. For more see this Bloomberg article.

Krugman: Why Oil Prices are Rising

No doubt the two factors that Krugman mentions are important but the price of oil also has a speculative component that puts it far above what it would be otherwise and also by limiting production OPEC nations are also an important factor in keeping the price very high. I would not be surprised to see a considerable decline at times in the future but obviously the decline will not last too long due to the factors mentioned by Krugman. This is from Krugman's blog.(NY Times)

April 15, 2008, 9:02 pm
Oil numbers
There are two basic facts that would seem to explain a lot about what’s happening to oil prices.
First, Gross World Product growth has accelerated — from 2.9 percent in the 90s to almost 5 percent in recent years, according to the IMF. All of this is because of growth in emerging economies, largely China.
Second, world oil production has stalled — after growing around 1.6% a year in the 90s, it’s been basically flat for the last three years.
So we’ve got rapidly growing demand due to industrialization in Asia colliding with stagnant supply, basically because oil is getting hard to find. (The demand shock is probably even bigger than the GDP number suggests, because China’s economy is highly energy-inefficient).
And the demand for oil is price-inelastic — that is, it takes big price increases to persuade people to use significantly less.
There’s probably more to the story, but that seems to be the basic thrust. And it seems to be a recipe for rising prices for a long time to come.
This is what peak oil is supposed to look like — not Oh My God We’ve Just Run Out Of Oil, but steady pressure on the economy and the way we live from rising energy prices and their consequences. And it doesn’t matter much whether we’re literally at the peak, or whether production can rise by a few million more barrels a day; unless there are big sources of oil out there, we’ll be feeling peakish for the foreseeable future.

Oil Prices and the Inevitability of Striking Iran

This is from Al Hayat.
This is a rather pessimistic analyses from Lebanon.


Oil Prices and the Inevitability of Striking Iran
Randa Takieddine Al-Hayat - 31/10/07//

With oil prices reaching $93 per barrel in the US earlier this week and the depreciation of the dollar to a record rate of $1.44 against the Euro, the possibility of oil price reaching $100 per barrel is no longer a speculation, but in fact, highly probable and perhaps imminent.

The causes of rising oil prices are many, most importantly the prevailing fear within various financial and commercial circles of an inevitable military strike launched by the US against Iran. Expectations of such a strike are high since Iran insists on continuing the development of its nuclear weapon while the US insists on preventing that. Some of President George's Bush's friends have reported him saying that he will not leave a nuclear Iran to his successor, regardless who that may be.

All American indicators show that the Bush administration is preparing for a strike, and the rising oil price to unprecedented levels is directly linked to the fears associated with this possibility which could inflame the whole region and disrupt the flow of oil supplies from a few countries in the region if Iran resorted to the suicidal attacks that it has been threatening to use in retaliation in case its nuclear plants were attacked by the US.

Iran's policy in the Middle East, starting with Iraq and including Lebanon, Palestine and the Gulf, implies that this state intends to use its huge oil revenues to push its allies in the region into wars in their locations in the hope of achieving regional hegemony and control for a radical regime that aims at becoming a nuclear power in the region.

The fears of Iranian retaliation to an American strike are also varied, and the presence of someone of the caliber of Ahmedinejad in the Iranian presidency cannot be assuring. Even within the Iranian regime itself, there is a sense of discontent and fear toward his domestic and foreign policies, proven by the resignation of Ali Larijani who was in charge of Iran's nuclear negotiations. Less assuring are the reports about the presence of Revolutionary Guard groups in training camps in Syria. All this is causing high levels of anxiety in the Gulf area, the main source of oil.

Rising oil prices represent higher revenues and profits for the countries of the region and that the Gulf countries are witnessing rapid growth in construction and mega projects that ensure the creation of new job opportunities for the residents of Arab countries that suffer economic difficulties. Over the past five years for example, the number of Lebanese working in Qatar has risen from a mere 5,000 to over 40,000, and in UAE, almost 200,000 Lebanese work there, let alone the thousands who live and work in Saudi Arabia. This is not to mention the Iraqi, Moroccan and Syrian communities. Despite all this, the rising oil price brings with it fears that end any satisfaction derived from high oil revenues because Iran's risky policies threaten the entire region and President Bush's hardened position against Iran's possession of nuclear capabilities increases the risks of widespread devastation.

Since the diplomatic path with Iran is not only ineffective, but it also seems to be in trouble, the "disastrous" option that French President Nicolas Sarkozy warned against, a military strike, is imminent, and oil prices will continue to fluctuate upwards.


The military strike against Iran will also threaten the international economy and make any solution for regional conflicts highly unlikely with the presence of two of Iran's allies, namely Syria and Hezbollah. Hence, there will be no end to the Lebanese problem nor for the situation in Iraq or the Israeli-Palestinian conflict.

Bush, on the other hand, continues to follow the same policy that he adopted in Iraq, occupying a big country to get rid of a terrible regime by adopting a losing strategy that has led to more disasters for this country. The fear now is that his policy toward Iran will lead him to commit an act that will lead to additional disasters and deterioration instead of solutions. The fears are real and protecting oil sources must remain a priority throughout this ordeal.





<

Iran Profits from oil price rise with crisis.

This is from the Scotsman. Of course all oil producers are getting a lot more for their oil because of the price rise including all those who oppose Iran!

Iran makes £55 million from hostage crisis as oil prices soar


GERRI PEEV
POLITICAL CORRESPONDENT (gpeev@scotsman.com)
IRAN is gaining up to £5 million a day from detaining 15 British sailors and marines as the crisis causes the price of oil to rise dramatically.

Since Iran's Revolutionary Guards seized the Britons 11 days ago, the price of oil has soared 10 per cent, reaching six-month highs of $66 per barrel in New York last week.

According to OPEC figures, Iran exports 2.3 million barrels of oil per day, meaning Tehran has profited from the crisis by up to £5 million a day. By the end of today, the extra cash it has raked in could total £55 million.

While the oil price has risen, the public pressure on Iran was lowered yesterday as more conciliatory stances were adopted.

Des Browne, the Secretary of State for Defence, said the UK government was holding bilateral talks with Iran over the detainees, who were seized in the Persian Gulf on 23 March.

"We are anxious that this matter be resolved as quickly as possible, and that it be resolved by diplomatic means and we are bending every single effort to that," he said.

And speaking to the BBC, Douglas Alexander, the Scottish Secretary, said:

"The responsible way forward is to continue the often unglamorous but important and quiet diplomatic work."

Iran also seemed to signal that a compromise could be possible after Manouchehr Mottaki, the country's foreign minister, said he was examining a letter from the British Foreign Office about the hostages.

"This note contains many points which will be considered," he said. "However, we are waiting for a change in the attitude of the British and a moderate approach by this country towards Iran's legal requests."

The Foreign Office is said to be considering offering Iran a way out without losing face over the crisis. One strategy discussed at a meeting of Whitehall's crisis committee would be to send a Royal Navy captain as a special envoy to Tehran, to seek a deal.

Attempts have backfired in recent days to "shame" Mahmoud Ahmadinejad's regime into admitting it was in the wrong after the Ministry of Defence released co-ordinates of where the UK team were picked up. Neither the UN nor the EU would fully back tough statements from Britain.

Mr Ahmadinejad, the Iran presiddnt, said on Saturday that Britain had not reacted in a "logical or legal" way. "The British government, instead of apologising and expressing regret over the action taken, started to claim that we are in their debt," he said.,

The US president, George Bush, waded into the row, accusing Iran of "inexcusable behaviour", adding: "Iran must give back the hostages. They're innocent, they did nothing wrong and they were summarily plucked out of waters."

Sir Malcolm Rifkind, MP, the former foreign secretary, called for pressure on the Iranians, but said the threat of sanctions should have been put "privately" first, "because otherwise the Iranians are pushed into a humiliating climbdown".

Meanwhile, the MoD's claim the Britons had been in Iraqi waters when they were captured was challenged yesterday.

Craig Murray, a former British ambassador, accused Tony Blair of being too cavalier in his insistence that the British were in Iraqi territory at the time of their kidnap at gunpoint.

VIOLENT PROTESTERS DEMAND BRITISH EMBASSY BE CLOSED
HUNDREDS of students threw rocks and fireworks at the British Embassy in Tehran yesterday, calling for the expulsion of the ambassador amid the stand-off over Iran's detention of 15 British sailors and marines.

Several dozen policemen prevented the protesters from entering the compound, although a few briefly scaled a fence outside the embassy's walls before being pushed back.

The protesters chanted "death to Britain" and "death to America" as they hurled stones into the courtyard of the embassy. They also shouted "the British spies should be tried".

Inside the compound, one diplomat said the atmosphere was "fairly relaxed" and that no fire or petrol bombs had been hurled over the walls.

But outside, student groups demanded that Tehran expel Geoffrey Adams, the British ambassador, and close down the embassy, calling it a "den of spies". They also urged Tehran not to release Leading Seaman Faye Turney, the lone female captive, or show any flexibility until the British have apologised.

The student protesters at the embassy were dispersed by Iranian police after two hours. The demonstrators belong to the hardline Basij volunteer militia, which is under the control of the Revolutionary Guards holding the Britons captive.

One demonstrator warned that the British Embassy could face a similar fate to that of the US mission in Tehran - stormed with hostages taken in 1980 - if "Britain keeps on speaking nonsense".

Thomas Palley on Manipulating the oil Reserve

This is certainly not the explanation usually given for rises and falls in oil prices!

This is by Thomas Palley a US economist his website is at:
http://www.thomaspalley.com/

»Manipulating the Oil Reserve
2006 was the year that oil prices came close to breaching eighty dollars per barrel. This was despite the fact that there were no significant supply interruptions and oil demand actually fell in industrialized countries. That raises the question of what caused the spike.

It turns out there is good reason to believe that record oil prices may be due to our own strategic oil reserve, which the Bush administration may have been manipulating to drive up prices for the benefit of its clients. This is something Congress must investigate, and here is some preliminary evidence.

Any finding of manipulation would go far beyond corruption and be close to economic treason. That is because when oil prices increase America must pay more for its imported oil. That increases the trade deficit and our foreign debt. Alternatively, one can think of price manipulation as the equivalent of a tax increase on American families that is paid to foreign governments, including Iran.

While some small energy scandals are under investigation by Congress, the big enchilada is the strategic oil reserve, which may have been “strategically” manipulated to drive up oil prices. The key to understanding this manipulation is demand and supply and oil storage capacity.

The last three years have seen rapidly rising oil prices, and a tight oil market has meant that even small increases in demand have had large price impacts. During this period the Bush administration purposely expanded inventories of the strategic oil reserve, which rose from 600 million barrels in May 2003 to 700 million barrels in August 2005. The administration therefore increased demand by 125,000 barrels per day, and oil prices rose from $30 dollars per barrel to $70 dollars.

As oil prices rose, Wall Street became increasingly engaged in commodity speculation (the destructive effects of which is a story for another day), and this is where storage matters. As speculators entered the market the spot price of crude oil rose above the futures price. However, buying spot oil means taking delivery, which requires storage capacity. By adding to the strategic reserve, the administration not only increased oil demand but also increased storage capacity because the oil it bought was stored in the strategic reserve’s caverns. That helped speculators by adding storage capacity vital for cornering the market.

That brings us to today. Over the last month spot oil prices have been tumbling. The reason is that the market has finally run out of storage capacity, which means that all oil produced must now be immediately sold – and that has driven oil prices down. This suggests there has never been a supply shortage warranting seventy-five dollar oil, and absent the administration’s dealings oil prices might not have risen as they did.

The story does not end here. With private sector oil storage capacity exhausted, the administration has now announced its intention to double the size of the strategic oil reserve from 700 million barrels to 1.5 billion barrels, and it plans to start purchasing 100,000 barrels of oil per day.

The result has been predictable, with the price of oil jumping from $50 to $55 per barrel over the last week (01/19/07 – 01/24/07). Not only will these purchases increase oil demand, they will also provide new storage capacity needed to re-corner the market.

One last piece of evidence concerns Hurricane Katrina and the oil loan program. Following Katrina, gulf oil production was interrupted causing shortages of crude for refineries. The administration’s response was to loan crude to refiners who were to pay it back in-kind. That was a huge gift to refiners who got the oil they wanted and then made a killing on the processed gasoline that was in short supply after Katrina. The proper way to handle the situation would have been to auction the oil, in which case taxpayers would have got the windfall disaster rent (excess profit) resulting from Katrina. This is because refiners would have been willing to pay a high price knowing that gas prices were high.

But there’s yet more damage. If government had auctioned the oil, it could have chosen when to buy it back. Instead, companies paid it back in-kind in late 2005 and early 2006, and these repayments tightened market demand and also freed up private storage capacity facilitating further market cornering.

The oil market is full of smoke that provides perfect cover for corruption. Every price blip calls forth explanations in terms of Chinese demand, more violence in Nigeria’s delta region, cold weather, threats from Venezuela’s Hugo Chavez, or heightened tensions over Iran’s nuclear program. The strategic reserve is the perfect vehicle for corruption since transactions can be cloaked in the veil of national defense. But the facts are clear. A motive exists, the bad character of the administration is known, and the circumstantial evidence is strong.

Congress must investigate the strategic oil reserve, how it has been managed and what its purpose is. The recently announced expansion serves no real national security function (though that will be the justification) and will only drive up oil prices and add to the budget deficit and national debt.

One last factoid. A recent IMF study documented that oil prices in the U.S. appear to be politically manipulated, falling prior to elections – as they did in 2002, 2004, and 2006. If you are an economist you ask how that is done. The answer is the strategic oil reserve.