INTRO: You know how gas prices have come down substantially
over the past few months forom over $5 per gallon to just under $4 per gallon?
Now of course, $4 per gallon is still significantly higher than where we were just a year ago,
but it is nonetheless still progress from $5 per gallon.
This has caused many to assume that supply chain issues have been resolving and that
inflation has been cooling down and so on.
And while these factors definitely do play a role, one of the most blatant reasons for
the recent decrease is oil stimulus from the US.
You see, the US department of Energy likes to keep a back up oil reserve called the US
Strategic Petroleum Reserve.
This reserve is meant for serious emergencies like the US getting into a war or the Middle
East staging a strike.
But, since March of this year, the US has been using these reserves to alleviate gas
prices.
Whether this is a justifiable reason is debateable, but one thing that’s for sure is that the
US has been depleting these reserves fast.
I could go through the specific numbers and stuff, but I think just looking at this chart
will tell you everything you need to know.
So how much longer do we have until the US depletes their backup reserves.
THE COUNTDOWN: To estimate how much time we have left, the
easiest thing to do would be to calculate the average rate of decline and use that to
project into the future.
If you zoom into the chart, you’ll see that the cliff dive really started in April of
2022 when the reserves stood at 568 million barrels of oil.
If we scroll over to October, however, the reserves are estimated to stand at just 359
million barrels.
That right there is not only a 40 year low in terms of reserves but also a record pace
of decline.
During this 6 month period, the US would’ve have used up 209 million barrels of reserve
oil.
That translates to an average of about 35 million barrels per month.
At that rate, the reserves would only last for another 10 months taking us to about August
of next year.
But, if we look closer at the data, we’ll see that we don’t have nearly that much
time.
Here’s the thing, not all crude oil is created equal and the US doesn’t just store one
type of crude oil.
They actually store two types called medium-sour and light-sweet.
To the naked eye, both of these would look the same as the differences are mainly internal.
Medium-sour oil has a higher density and a higher sulfur content which what the world
has become accustomed to.
This is the type of oil that is pumped out of Russia, Venezuela and much of the Middle
East.
And this is the type of oil that the US refiners are used to.
And given that refiners are currently the biggest bottleneck in the oil market, the
US has leaned into their needs.
In other words, the vast majority of oil the US has been unloading as in 85% is medium
sour crude oil.
This means that out of the 35 million barrels that they were offloading every month, roughly
30 million barrels were sour and 5 million were sweet.
This wouldn’t be that big of a problem if medium sour accounted for 85% of their reserves,
but it doesn’t.
According to government’s website, 40% of their reserves were sweet and 60% were sour
as of the beginning of 2022.
If we assume that this ratio was more or less maintained until we saw the cliff dive in
April, we started with roughly 340 million barrels of sour oil and 227 million barrels
of sweet oil.
At a rate of 30 million barrels of sour oil and 5 million barrels of sweet oil every month,
we’ll be left with approximately 160 million barrels of sour oil and 197 million barrels
of sweet oil by October.
If we don’t change up our rate of consumption or ratio of consumption, the sour oil reserves
will be gone by March.
As for the sweet oil reserves, we’ll still have plenty of that, but that probably wouldn’t
be all that helpful.
Here’s the thing, when you have a refining bottle neck with sweet oil, pumping up the
supply won’t actually lead to more final output.
Also, it’s unlikely that refiners will be willing to expand their light sweet operations
all that much when this is just a temporary influx of sweet oil.
So, the countdown has already started, at it’s just a matter of months until the US
will have to pull the plug.
RUGPULL: Now, you might be thinking that this was a
nice thing for the government to do.
They finally stepped up and took action against oil prices that were spiraling out of control.
While that could definitely be the case, it’s not that likely.
You see, the US never taps into this oil reserve.
Looking at this graph, you can see that the reserves are always stagnating or going up.
This is literally the first the time the US has been depleting SPR reserves since it was
created way back in 1975.
They didn’t even deplete the reserves in 2008 when the US saw a massive recession and
oil prices hit over $180 per barrel.
So, clearly, they’re more desperate than ever before.
And why are they more desperate than ever before, well it’s because inflation is way
out of control and its making the incumbent politicians look incompetent right before
the mid term elections.
And that right there is the key to everything they’ve been doing.
Obviously, there’s nothing the politicians can do to bring inflation down to 3% or solve
the supply shortage within the next two months.
But, something they can do is deplete the emergency oil reserves to create the impression
that inflation is coming down.
Here’s the thing, the average person doesn’t actually follow CPI readings on a monthly
basis.
Their gauge of inflation is simply based on how much their daily and monthly expenses
are.
If they suddenly go to the pump one day and their bill is $10 lower than usual, they’re
gonna assume that inflation is getting better.
It’s not just the pump that they’ll see this difference either.
When you bring down oil prices, you bring down prices across the board because almost
all everyday goods rely on transportation.
Take milk prices for example.
Milk is still super expensive on a historical basis, but prices have stopped going up since
May.
We don’t know how much of this is actually due to oil prices coming down, but one thing’s
for sure, they’re definitely trying.
The only problem though is that all the signs point to them stopping trying right after
the election is over.
Take the oil depletion for example.
If the rate of depletion was 15 or 20 million barrels of oil per month, we could come to
the conclusion that maybe its more of a long term plan.
This rate would actually be sustainable for a few years which might be enough time for
oil prices to naturally cool down.
But, with a depletion rate of 35 million barrels per month and sour oil reserves being projected
to run out by Q2 of next year, it’s hard to believe that this is anything but a short
term political play.
It seems like they wanted to bring down oil prices as much as much as possible before
the election, but after the election, it doesn’t seem like they care all that much.
Even if they did care, it’s not like they could do anything about it given that the
oil reserves would already be nearly depleted.
So, in my opinion, I think it’s highly likely that they rugpull us shortly after the election,
but I’ll let you be the judge of that.
AFTERMATH: Whether this is all just one big political
move or not, in the end, it doesn’t really matter.
Either way, we end up in the same destination which is depleted emergency oil reserves.
So, what happens next?
Well, fortunately for us, the US department of Treasury has done some studies regarding
how the emergency reserves are affecting gas prices.
To accomplish this, they looked at data regarding the stock of oil or the supply and the flow
of oil.
Now of course, no model is perfect and that applies to the US Treasury as well.
For example, in their calculations, they assumed that there is zero elasticity on the supply
side.
Similarly, they also assumed that logistical and technical issues can be ignored.
Given how bad the supply chain has been over the past 2 years, these assumptions are obviously
not super realistic, but it’s the best that we’ve got.
According to the study, the release of American oil reserves has resulted in a price reduction
of 33 cents per gallon.
Something that we should note is that it wasn’t just the US that was depleting their oil reserves
either.
When President Biden announced his plan to leverage American reserves, he also got partners
in the IEA or the International Energy Agency to play along.
Together, it’s estimated that they’ve brought down oil prices by approximately 0.38
center per gallon.
So, simple logic tells us that when these organizations stop injecting oil in the system,
gas prices should go up by 38 cents, but it’s obviously not that simple.
If oil prices naturally cool down by this point, then maybe we can see oil prices continue
to trend down even after these guys withdraw their support.
This would be the most ideal situation, and hopefully, it’s what happens.
If oil prices are still at relatively high levels, however, we could easily see oil prices
spike by much more than 38 cents because we would no longer have a safety net.
Oil suppliers will be well aware that the US can’t pull off this stunt again, so they
might have even more pricing power than they had before this fiasco.
The country that America would really have to worry about is not Saudi Arabia or some
other Middle Eastern country, they would actually have to worry about Canada.
Most people don’t know this, but Canada is actually America’s number 1 sources of
imported oil.
Literally 62% of US crude oil imports comes from Canada, so they have quite a bit of power.
Fortunately, the US and Canada are pretty good allies, so it’s extremely unlikely
that Canada would do anything to destroy America.
For example, they’re not gonna stop oil exports altogether and watch as gas prices
shoot up to $30 per gallon in America.
But, just because they wont do something so drastic doesn’t mean that they’ll be gracious
with pricing because America has never been gracious with pricing when it comes to Canadian
oil.
You see, Canada actually has the third largest oil reserves in the entire world.
But, they’ve never really been able to leverage this to become a global player.
If you’re interested in why, I have a full video about Canada’s oil situation.
But, long story short, Canada has been forced into a situation where 99% of their oil ends
up in the North American market or basically just America.
And this has given the US the opportunity to basically blackmail Canada into giving
them cheap oil.
The argument from the US is usually, we have these massive reserves as well sources from
Russia and the Middle East.
So, we don’t need you, you need us, so if you want us to buy your oil, give us a discount.
And that’s exactly what Canada’s been doing with the average discount on Canadian
oil being $20 per barrel.
But, now the table have turned.
The emergency reserves are rapidly depleting and Russia is out of the equation, so Canada
has the upper hand.
And honestly, after getting taken advantage of for so many decades, I think it’s only
fair that Canada gets to turn the script on the US, but let’s just say, it wont be very
fun for our pocket books.
GAS PRICES: In the end, if you’ve been wondering why
gas prices have been plummeting over the past few months, it’s not because inflation is
coming down.
It’s actually because the government has essentially been handing out gas stimulus
from their emergency reserves.
At the current rate, however, they wont be able to sustain this stimulus for much longer,
but honestly, that seems to have been their plan all along.
Cool down gas prices before the election as much as possible and we’ll worry about the
rest later.
In the medium term, this may end up giving Canada more pricing power than ever, allowing
them to finally have some time in the spotlight at the expense of everyday Americans.
Again, I wouldn’t blame Canada for this, but rather American politicians for putting
America in such a situation.
But, that’s just what I think.
Do you think it was justified to leverage the emergency oil reserves?
Comment that down below.
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