Yesterday (Wednesday), US Pres. Obama gave a speech entitled, “A Secure Energy Future,” discussing the high cost of energy and its effect on the American public. The key point was contained in the following paragraph:
“…When I was elected to this office, America imported 11 million barrels of oil a day. By a little more than a decade from now, we will have cut that by one-third...”
We question the logic of cutting down on imports. According to the latest preliminary weekly data from the DOE, we imported 8.41 MMbbls/d of crude oil last week. Our largest trading partner was Canada, with 2.05 MMbbls/d of supply with Venezuela coming in a distant second at 1.08 MMbbls/d.
In a perfect world, we could cut out more volatile or politically risky sources such as Venezuela (due to Chavez), Saudi Arabia and Russia for a 30% or 2.51 MMbbl/d drop in imports. But would this achieve Pres. Obama’s goal of lower prices?
The president answered his own question at the beginning of his speech, stating that after summer 2008, “When gas prices finally did fall, it was mostly because the global recession had led to less demand for oil… the demand for petroleum went down; prices went down.”
We don’t have to be Larry Summers to take the supply/demand economics a few steps further. Lower global demand meant more barrels were on the market. More barrels meant lower prices as producers struggled to sell their inventory. Ergo, the supply of petroleum went up; prices went down.
Now we want to reach lower prices by cutting down on supply? We would love to assume that domestic production and energy efficiencies can make up for lost imports, but that could not seem more impossible. Domestic production has declined from 8.68 MMbbls/d in March 1983 to 7.28 MMbbls/d in 1992 to just 5.57 MMbbls/d as of writing. Many of these wells have been shut in and are not coming back. As for the argument for improved ‘efficiency’, well, domestic electricity consumption per person has increased 32.22% since 1980. If we are becoming more efficient, we are more than making up for it by consuming more.
Put simply, as written in today’s issue of The Schork Report, yesterday’s announcement could not put us further from the desirable goal of lower prices.
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Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.