Re: Oil-The Admin’s “Kobayashi Maru.”
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Re: Oil-The Admin’s “Kobayashi Maru.”
The No-Win Options of the Biden Admin's Energy Policies.
Despite pursuing a myriad of policy missteps that have simultaneously alienated OPEC+ and disincentivized investment in the domestic O&G space, the Admin has embarked on an unwinnable rhetorical war against rising energy prices.
I have been speaking with several industry experts over the last several days and have compiled a list of FOUR possible policy ACTIONS the Admin might be considering. The Admin has painted itself into a corner – like the no-win “Kobayashi Maru” training simulation in Star Trek.
NO-WIN OPTION 1: Relax RIN Quotas For Refiners. Renewable Identification Numbers are market-based “credits” created in the mid-2000s to give flexibility to refiners for compliance with the Renewable Fuel Standard that stipulates minimum ethanol blending requirements.
Refiners are required to blend a certain amount of biofuels/ethanol and/or buy these RINs to satisfy these quotas. These requirements are all additive to the cost of refining gasoline, and relaxing these requirements presumably reduces gasoline prices.
The problem is that corn prices have also ripped in this broad-based commodity rally, and experts think the gasoline savings could be only 8-10c/gallon (25c would be an outside upside case). Will the Biden Admin risk pissing off environmentalists over such a paltry gain?
NO-WIN OPTION 2: SPR Release. This proverbial “horse” has been beaten to death over the last several weeks, as the Admin keeps jawboning this threat, with the latest twist being a “coordinated” release with China.
Some would argue that the jawboning has “worked,” given the $7/bbl decline from recent highs. Has it really? Whether the release is 20 mm or 60 mm bbls, it is still like “spitting in the ocean” (h/t Lakshmi) when the world consumes over 100 mm bbls/DAY.
Also, what is DEstocked from “emergency” supplies will need to be REstocked eventually. What if the world finds itself in a deep structural shortage and these supplies need to be bought back at $150-$200/bbl in the future?
Like the Boy Who Cried Wolf, the Admin’s SPR jawboning has inured the market to such a degree that today’s headlines with China seemingly backing up the “coordinated release” rhetoric were met with a RALLY. Classic “sell-the-rumor/buy- the-fact” behavior.
Not only that, by jawboning the market down (assuming that this was the main driver), I believe it all but guarantees that the ONLY potential deviation from OPEC+’s DoC scheduled additions will be DOWN imho.
Finally, my experts noted that the actual SPR release might be held in the Admin’s “back pocket” to brandish when news hits the tape that JCPOA 2.0 negotiations with Iran FAIL.
The experts seem to agree that these talks are “in shambles” given Iran’s brazen cheating and the Admin’s inability/unwillingness to enforce sanctions.
And how about this double “no-win” whammy – let’s say JCPOA 2.0 does come to pass by some miracle. My experts think that the amount of contra-barrels in the market is so high that the additional Iranian bbls may only be 600kbpd – phased in over time!
NO-WIN OPTION 3: Ban Exports of Products/LNG. This is really the first time I’ve even heard of this as a possibility, albeit an extremely low-probability one at that.
Two main obstacles: 1) a product export ban has never been enacted historically and it would be difficult to justify, 2) an LNG ban in particular would be a “geopolitical football” as it would really fuck our European allies and hand a win to Putin. ‘Nuff said.
NO-WIN OPTION 4: Ban Exports of Oil. This brings me to my Chief Bogeyman, because 1) it has been brought up by the DOE Secretary, 2) it has some support from ignorant folks in Congress, and 3) it looks politically attractive from a first-order thinking perspective.
Here’s why an export ban on oil would be DISASTROUS not just for US shale but for the entire world. I wrote some initial thoughts below, but I am adding more detail in this thread.
The crux of the issue is that US shale produces/exports LIGHT grades (which comprise almost 100% of our crude exports) but our refineries predominantly require medium-heavy blends, which is why almost all of our crude imports are HEAVY grades.
Let’s play out what happens the day an export ban is enacted. First, the bulk of our domestic refining capacity located at the Gulf Coast (PADD III) has to turn back about 2.5-3 mmbpd to Cushing, which will fill up to tank-tops rapidly. See April,2020 WTI chart for what happens.
It gets better. UNLIKE April,2020 where Brent also got smashed, this time Brent would SPIKE along with other light grades (Bonnie Light, Angola, Urals, Arab Light – these are NOT beers!) because RoW would be SHORT these 2.5-3 mmbpd now trapped at Cushing with nowhere to go!
It gets even better. East Coast refineries (PADD I) which would ironically be able to use lighter grades have NO WAY of getting the excess oil trapped in Cushing/Gulf Coast and would have to IMPORT more Brent (now spiking) AND gasoline (also now spiking).
For those pooh-poohing this outcome thinking that things will equilibrate “over time,” we’re talking about retooling our refineries to take lighter blends and building pipelines to channel excess oil from mid-continent to PADD I which would take 5+ YEARS and TENS of BILLIONS.
OOPS — meanwhile, while this is happening, US shale players (responsible for producing 8.7 mmbpd out of 12 mmbpd projected YE’22) would essentially be BANKRUPTED and cost the country hundreds of thousands of JOBS, not to mention BILLIONS in EXPORT DOLLARS.
If that happens, where does RoW find the additional 8.7 mmbpd? Even the most conservative estimates of OPEC+ spare capacity don’t come close to meeting that call. Try to envision $300/bbl and $15/gal at the pump. Yeah, that bad.
My experts tell me that “almost everyone in the Admin understands this math [given how disastrous the consequences are].” I HOPE that this is the case, but the public commentary I’ve seen and the complete lack of O&G bench depth in the DOE/FEMC worry me.