One Chart That Explains the Recent Oil Price Collapse

As shown by the chart below, the Biden administration is selling off US Strategic Petroleum Reserves (SPR) at the fastest pace on record. As of today, we are now at the lowest levels since 1985.

Source: Bloomberg, Financial Sense Wealth Management

Here is where things get concerning: despite the biggest decline EVER in the SPR, total US oil inventories (outside of the government’s emergency SPR) have barely budged off their lows. Let me repeat that. The biggest release of oil EVER in the US has barely increased our total domestic inventories.

Source: Bloomberg, Financial Sense Wealth Management

When we look at the 10-year seasonal pattern for total US oil inventories, we are well below the 10-year extreme low and, seasonally, inventories decline into late September. We can only imagine where prices would be had the Biden administration not been selling our reserves like there’s no tomorrow.

Source: Bloomberg, Financial Sense Wealth Management

This is not just a US problem of course but a WORLD problem of a lack of supply. The data comes out with a big lag but as of March, total OECD oil inventories (OECD countries make up 63% of total world GDP) have fallen dramatically to the lowest level since 2005. Once we get the most recent data, I am sure we will be at the lowest levels in a quarter century.

Source: Bloomberg, Financial Sense Wealth Management

We bailed out banks, auto companies and insurance giants in 2008 and airlines in 2020 but it would be political suicide to bail out energy companies, which is exactly what was needed two years ago. Given most in the US shunned the energy industry to focus on green energy, we failed to support necessary infrastructure in the US to secure our supplies as so many refineries went under during the COVID-induced lockdowns never to open their doors again. So, as US demand for gasoline returned once the US economy reopened, we did so with less, not more, refinery capacity where US refinery capacity fell to the lowest level in 8 years by the end of 2021.

Source: Bloomberg, Financial Sense Wealth Management

I listened to an hour-long interview by Grant Williams who interviewed Goldman’s top commodity guy Jeff Curie who went on to say “We need a Lake Erie fire event” to wake people up into action. For those who don’t know, Lake Erie caught on fire in 1969 due to excessive pollution and acid rain that shocked America into reality to address the pollution problem that ultimately created the EPA and Clean Water Act.

He said it often takes a crisis to create action and we are unfortunately heading to a humanitarian crisis where the whole world thought it could just turn away from fossil fuels and quickly transition to green energy. As I wrote to clients last fall:

Since 2007, according to BP’s Statistical Review of World Energy, the U.S. has cut its coal production by 55%, Germany by 56%, and the U.K. by 90%. We’ve even seen a reduction on the reliance of clean nuclear energy since the 2011 Japanese Fukushima nuclear meltdown. Japan has cut its nuclear energy consumption by 82% since 2011, while Germany has cut its consumption by 46%. Nuclear consumption here in the U.S. and the U.K. has remained steady while China’s nuclear consumption has grown by 298% as part of a concerted effort to shift away from coal and reduce air pollution. In terms of natural gas, since 2007, China has grown its production by 229%, the U.S. by 82%, while Germany has cut its natural gas production by 73% and the U.K. by 53%.

Considering dramatic cuts to production and consumption of nuclear, coal, and natural gas, Europe and the U.K. are leaving themselves at the mercy of Russia and the U.S. to help meet their needs and both regions better pray for a mild winter this year or the recent price spikes in energy could get a lot worse.

We believe we will see much higher oil prices in the years ahead and many will suffer the consequences for aggressive green energy and anti-fossil fuel policies, as we are seeing today. Businesses in the UK and Europe are closing left and right due to the skyrocketing electricity prices and many can’t even buy necessities as their discretionary spending is getting squeezed.

Source: Bloomberg

As Jeff Curie pointed out, you cannot have economic growth without energy to power that growth and we will continue to see a humanitarian crisis until governments all over the world work to increase natural gas, nuclear energy, and oil production. If they don’t, shortages, cost-of-living spikes, and disruptions to our food and energy systems are likely to persist.

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