In these days of multitrillion-dollar federal deficits, a windfall of a billion dollars or so for the treasury may sound like a rounding error.
Now, let me back up a bit and explain what I’m talking about.
It involves making an unconventional use of the federal Strategic Petroleum Reserve to take advantage of the big gap between the current and future prices of U.S. crude oil.
Current prices are way down because demand has collapsed as a result of the covid-19 pandemic and because there is so much surplus oil sloshing around that there’s little storage capacity available to hold any new oil that gets produced.
However, the Strategic Petroleum Reserve — which we’ll call SPR from now on — had 78.5 million barrels of spare capacity available as of April 10, the most recent data available. That’s a lot of spare capacity — and it has the potential to turn a quick, nifty profit for taxpayers.
Had the federal government been able to act in a financially astute way last week, it could have bought 78.5 million barrels of crude oil for the SPR at Friday’s price of $18.27 on the New York Mercantile Exchange and simultaneously gotten $33.82 by agreeing to deliver that same amount of oil in December. That $15.55 per barrel difference would have let the government sell the oil for $1.22 billion more than the SPR would have paid for it.
Given the huge plunge in oil prices as I write this Monday morning, the profit would be about half a billion dollars higher.
Why didn’t the government use the SPR to make some money, which also would have propped up oil prices and held down future oil prices? And why am I talking about a potential $860 million windfall (at Friday’s prices) rather than a potential $1.22 billion windfall?
First, because arbitraging oil by simultaneously buying and selling it is a Wall Street way of thinking, not a federal government way of thinking.
Second, because in the last stimulus package, Congress refused to grant the Energy Department the money it sought to buy oil for the SPR. So the SPR couldn’t have bought the oil and I don’t think it has the authority to sell oil in the futures market. At least, it hasn’t done so since it was founded in 1975.
In theory, President Trump could have issued yet another of his “emergency” decrees to order the SPR to simultaneously buy and sell oil. But he didn’t.
I figure that’s probably because the unconventional idea of using our strategic oil reserve to make money by simultaneously buying and selling oil hadn’t occurred to his advisers.
Now, let me tell you why I think oil companies rather than taxpayers will profit from the SPR’s spare storage capacity if something isn’t done — quickly — by Trump, Congress or both.
I’m talking about a potential $860 million taxpayer windfall (at Friday’s prices) rather than a potential $1.22 billion windfall because the Trump administration has ordered the SPR to store 23 million barrels of oil for hard-pressed oil companies.
Subtract those 23 million barrels from the SPR’s spare capacity and it falls to 55.5 million barrels. Assume the same $15.55 per barrel spread we discussed earlier (based on Friday’s numbers) and the potential profit is $863 million.
The Energy Department declined to say how big the storage fee is — it takes the form of the SPR returning less oil to the companies than they deposited in the caverns where the reserves are held. The department also declined to say for how long it would store the oil.
The one thing we can be sure of, though, is that the companies depositing the oil and then getting most of it back will turn a tidy profit that could otherwise have gone to the taxpayers.
That’s because June oil futures were selling Friday for 34 percent more than the then-current price, July futures were 57 percent higher, and the numbers kept climbing from there. That spread is doubtless way more than the rent rate that the SPR will get.
I can understand why some people oppose anything that helps increase oil production, which is reportedly the reason that the Energy Department’s request for money to buy oil for the SPR didn’t make it into the recent stimulus legislation.
But let’s get real. If the SPR isn’t given the authority to simultaneously buy and sell oil to earn a profit, that profit is going to go to oil companies.
That’s because Trump has the authority to order the SPR to store oil for producers, and there’s no reason to think that he won’t commit essentially all the reserve’s spare capacity to do that.
And unless the rent the SPR charges is exorbitant — which I’m sure it won’t be — oil producers will end up with profits that taxpayers could have gotten. I’d rather that taxpayers profit from the SPR, which was established at taxpayer expense, than for oil companies to profit from it.
Sure, even a billion or 2 billion bucks is a drop in the bucket compared with the looming budget deficits. But it’s a lot more than nothing. Which is what we taxpayers will end up with unless someone deals with the problem.