2011 June 24

The Master Resource Report  2011-06-24

Saudi Arabia – oil as a political weapon.    (page 1 ) 

How much will you pay per month to be green?    (page 2 ) 

Hydrogen fuel.   (page 2 ) 

Diversification.   (page 3 ) 

The coal value chain – railroads.   (page 3 ) 

Seven year comparison of the world price of oil.   (page 4 ) 

30 million barrels from the SPR

So the big news yesterday was that the “… International Energy Agency said its members will release 60 million barrels of crude from emergency stocks, half from the U.S. strategic reserve, to offset production lost to the unrest in Libya, only the third time in its history that the IEA has intervened in this way.”

This is a great mismatch of a short-term fix to a chronic long-term problem. This may prove to be a historic event that begins to lay bare the realities surrounding petroleum supply growth in the future. Don’t forget that Saudi Arabia already failed once this year to bring new supply and provide relief to the rising price. If the country that supposedly control approximately 75% of global spare oil production capacity couldn’t impact price how is a trickle from the SPR going to do it for any period of time?

Have the IEA and the OECD members it represents panicked? Is this a petroleum based QE3?

The IEA has been making it very clear for weeks that the global economy is at risk with oil price above $100 per barrel and that supply was inadequate. Therefore this action may be one of the best indicators yet that there really is a global supply problem that the IEA is taking very seriously. There is one other possibility. It is part of the oil weapon’s use against Iran. There is more on this possible situation involving Saudi Arabia in this week’s report.

The U.S. needs to sell about 5 million barrels of oil from the SPR in the next 12 months anyway to allow for the repair of one of the storage caverns. Provisions for this sale are part of the pending budget package currently being fought over in Congress. With this new decision these barrels can now be used in the 30 million barrel release just announced allowing the repairs to go forward even if the budget bill doesn’t pass or include the sale provision.

It is also important to remember that this action comes on the back of a failed proposal to swap crude oil between the U.S. SPR and Saudi Arabia that was covered in last week’s report (page 2). It is hard to filter out the extent that U.S. and other importing country’s domestic policy along Saudi regional political issues were the bound up the IEA decision yesterday.

There will be plenty of speculation and commentary on what this all means and what the impact will be. The value for long-term investors will be in ferreting out the bits of information that will inevitably become available providing clues to the long-term conditions in the petroleum supply scenario. This insight will pay large dividends going forward as the markets adjust and reality takes control.

The first lesson to take away for now is that market manipulation is ok as long as it manipulates the price down.