Biden SPR Release to Fight Inflation and Appease Voters

Many investors are learning more about the Strategic Petroleum Reserve (SPR) that President Biden is depleting to bring down the price of gasoline. The SPR was created after the 1973 Arab Oil embargo against the US for its support of Israel in the 6-day War. A Saudi led Oil ban in October 1973 exacerbated a Global Recession and compelled the US to create emergency Oil storage sites in salt caverns that would hold over 700 million barrels. This SPR was meant to take away the Oil weapon that Arab countries used to humble the US and Europe. The US has only released modest reserves from the SPR since its inception for minor disruptions due to weather or foreign supplier interruptions. The 290 million barrels of Oil being tapped by Biden’s three orders in recent months will leave the SPR with less than half of its capacity. Even though the US is almost energy independent with regards to Oil and Gas, the SPR release was deemed necessary to lower gasoline prices and appease angry consumers that blamed Biden for much of the persistently high inflation. The Administration claimed the extra supply would bridge the gap until global production increased enough to replace most of the lost Russian oil exports. 

As our recent report illustrated, Oil prices have not risen much since Russia invaded Ukraine, in contrast to the media’s portrayal. The post Covid global expansion, juiced by record monetary and fiscal stimulus, combined with very low oil inventories, were the primary causes of higher energy prices to date. The 180 million barrels of oil being withdrawn from the SPR over the next 6 months along with another 60 million around the world is impressive, but this is less than a 2% boost to daily world supplies and history indicates it may not have much effect. Most analysts have opined that this major drain of the SPR is in part a public relations effort to assuage middle class voting consumers as well as an effort to cap energy inflation. The Government deserves some credit for encouraging increased energy output from all sources including rapid approvals of new Natural Gas (LNG) ports that are vital long term solutions. Increased coal, uranium, nuclear and alternative energy supplies need to be pursued to replace the addiction to Russian energy, but all efforts will take years to manifest. Russian and Ukrainian “exports” supply 30% of global wheat, 40% of uranium, 20% of fertilizer, 7% of natural gas, and 5% of oil. These are all major volumes that will take years to replace and allow investors long term investments in these areas. If esteemed author Peter Zeihan is correct, even peace and the gradual removal of sanctions upon Russia will not prevent further global supply shortfalls over the next year, unless a Recession deflates demand. So far the Covid rel;ated economic slowdown in China and the lack of energy sanctions against Russia has been more impacxtful in lowering Oil prices recently than the vaunted release of Oil supplies from the SPR.

With record low customer inventories, huge backlogs and record job openings, there is no economic Recession possible near term. However, the Fed will keep raising rates and the Government will continue to refrain from new stimulus until consumers reduce their profligate spending patterns and signs of an economic Recession become more evident. With another 13-quarter point Federal Funds rate hikes being discussed over the next 18 months, the odds of Recession in 2023 are rising. For now, energy sector profits remain strong in 2022 after registering the highest investor returns of any sector in 2021. While many factors have created the current high inflation environment, the Democrat party is in charge and thus blamed for all ills by voters. To shift the blame, the Administration is pointing fingers at Big Oil for price gouging as well as Putin’s war.  Of course, just like 2008 when Oil spiked over $140, energy companies are not gouging and have lower profit margins than the broader SP 500 Index. Without energy sanctions against Russia by Europe, the price at the pump may stay stable or even fall short term, but we continue to like the volume expansion in the fossil fuel and nuclear energy sectors as the reshoring wave will take years to achieve independence from Russia.

Our top Russia related investor focus remains strong in Natural Gas, Uranium, Wheat, Fertilizer (Ag), Military and Cyber-security.

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