Who is borrowing what from whom?

CNN lists the companies that have so far borrowed oil from the US Strategic Reserve
Up until Friday's approval by the IEA, the Department of Energy had approved loans totaling 9.1 million barrels to refiners ExxonMobil, Placid Refining, Valero Energy and Total S.A.

Late Friday afternoon, the Department of Energy had approved two additional loans from the SPR -- 2 million barrels to British Petroleum (BP) and 1.5 million barrels to Marathon Oil.

As part of the agreement, oil companies are expected to return the oil to the emergency stockpile once supply conditions have returned to normal.

Meanwhile the source of the IEA offer is also becoming clear.  Bloomberg has the story on which countries are contributing the gasoline - it is not, necessarily, from where you would have thought.
Half the oil in the IEA release will come from the U.S. strategic reserve as crude. The other half will be ``mainly'' oil products, including gasoline, Mandil said. About 20 percent will come from Japan and other Asian countries, 10 percent from Germany, 7 percent from France and 5 percent from Spain, he said.
UPDATE And thanks to ClintB, for the lead to Business Week which gives more detail, including the interest rates
the government demanded a volume premium of 1.8% to 5.6% on 5.4 million barrels of sweet-crude loans to five refiners, to be repaid in three to six months.
. Incidentally the reason no more is coming from Europe is apparently a lack of available tankers.
And this brings up the whole issue of the Strategic Petroleum Reserves. Until recently the US was still filling ours, up to its current level of 700 mb with the new intent to go to 1,000 mb. Now the Chinese have just built their first facility, and plan on extending it further. At one time they were talking about starting to buy about 600,000 bd from about now to begin filling it. Well here we are with both apparent demand and supply balanced at around 84 mbd. We have just dropped overall production by let us say 1 mbd. At some stage in the none too distant future the oil companies now borrowing up to 2 mbd will have to give it back. If at the same time the US and China (not to mention any others with similar concerns - note where we are borrowing oil) also start to increase their own SPR's then it is quite likely that we can see an increased demand for 2 mbd or more, going into such reserves.

Now while I understand the reasons for this, and Econbrowser's points about putting it away against future value, what worries me more than a little is that this is bound to bring additional pressure against the available supply, with an obvious increase in cost. Surely that was not the intent when the decision was made to increase the US SPR ?

And further to comments we have made about the difficulty in getting to Port Fourchon and the supply depots at Venice. The NYT has a story about the conditions in that area. When the movie "The Oil Storm" described the fictional aftermath it got this bit sadly correct

Few if any houses survived; those not still under water were flattened in place or thrown acres away. Hundreds of pleasure boats, fishing vessels and small ships were indiscriminately dry-docked, tossed onto embankments, into swamps, even onto the state highway. Oil refinery tanks crumpled into balls; bits and pieces of homes scattered like confetti; downed telephone wires snaked off into uselessness; and virtually no living thing was around, save for stranded livestock, crying seagulls and a few dogs looking for masters. There is no visible National Guard presence, no smaller version of the hectic recovery taking place farther north. This is partly because the hurricane essentially severed the area from the rest of Louisiana; the view by helicopter, the only way to get here other than by boat, shows impassable Route 23 submerged then dry, submerged then dry. . . . . He started walking north on a deserted stretch of Route 23 called the Empire Bridge, accompanied by his oil rigger of a son, Ryan, and Lt. Steve Zegura. They pointed out how the hurricane had twisted the bridge, bending it west toward the bay.
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Just found this Business Week article from Platt's with lots of detail.


The article says that when reduced runs are included at a number of midwest refineries due to crude shortages, we are short 15% of refining.

I am amazed at how little the MSM is discussing future gas shortages.  It seems to demonstrate a high level of administration control to stave off hoarding, which I guess might buy some time.  I am supposed to fly from AZ to Washington DC next week on business, a trip I make every six weeks or so.  The trip will either get cancelled or be more interesting than usual...

MMS Shut-in report as of Monday -- as of Friday was 78.98% oil / 57.80% gas so some/little progress oil/gas, now at 69.57% / 54.13%; more rigs manned, probably another day or two of 'easy' gains and then we'll probably see numbers start to hold static for a while:


These evacuations are equivalent to 27.83% of 819 manned platforms and 27.61% of 134 rigs currently operating in the Gulf of Mexico (GOM). The number of manned platforms that are evacuated declined 25 percent from yesterday.

Today's shut-in oil production is 1,043,681 BOPD. This shut-in oil production is equivalent to 69.57% of the daily oil production in the GOM, which is currently approximately 1.5 million BOPD. This represents a 5 percent improvement from yesterday's figures.

Today's shut-in gas production is 5.225 BCFPD. This shut-in gas production is equivalent to 54.13% of the daily gas production in the GOM, which is currently approximately 10 BCFPD. This represents a 2 percent improvement from Sunday's figures.

The cumulative shut-in oil production for the period 8/26/05-9/3/05 is 11,985,960 bbls, which is equivalent to 2.189% of the yearly production of oil in the GOM (approximately 547.5 million barrels).

The cumulative shut-in gas production 8/26/05-9/5/05 is 64.087 BCF, which is equivalent to 1.756% of the yearly production of gas in the GOM (approximately 3.65 TCF).

Interesting admission (slip?) in this MSNBC article today, it seems the Plantation Pipeline is at now capable of running at capacity...

"Kinder Morgan Energy Partners' Plantation Pipe Line Co., which transports fuel from refineries to Eastern markets, has been capable of full capacity operations once it receives fuel from downed refineries."

I guess the tank farms next to the refineries must be emptying now.  At the end of last week, the news that pipelines were coming back on-line was enough to send wholesale gas lower and support the media's case for the unlikeliness of shortages.  Preferred media policy: good news encouraged, no factual news and resulting hoarding, please...


BTW, there's a story on Washington Post saying that cleaning up NO from the toxic waste would cost more than "the entire gross-domestic production of the United States". It also sayed that the Army Corps of Engineers plan to pump the chemically and biologically contaminated water into the Gulf of Mexico. Will they be able to get the oil and gas production back on line if the waters around the oil rigs and the LOOP are hazardous?  

Also, with the war in Iraq and tax cuts, not to mention the peak oil in the not-so-distant future, where will the government get all the money to handle the situation?


And if they run the reconstruction like the Iraq war, they'll need at least 50% more money than they think to allow for skimming.
Watching the news channels overnight, and from the comments that the Corps of Engineers have made I gather that at the moment the pumps will be turned on (as they are starting to be) and that the water is going straight into the canals and thus back up into Lake Pontchartrain.  In the greater scheme of things, when one of the anchors asked a Corps of Engineers guy about the Environmental aspects he was told, relatively politely, that at the moment there are more pressing concerns.
If they pump the stuff into the lake then who would want to live in the (New) New Orleans? I mean, a devastated city next to a liquid dump?
I wonder to what degree the domino effect has been set in motion.  The thought has already been mentioned, yet if the combination of all the steps these energy "entities" have taken (since Katrina) is considered, I wonder what implications we face in both the short and long term?  

Perhaps we are still too close to the event to grasp these affects.  But at least in terms of the short term gasoline supply / price, I wonder how much stress the US economy can take without suffering significantly in the long term?

More specifically, how long can our economy withstand $3 + gasoline?  In the US, much (if not all) of the surplus income that lower and middle class families have will be redirected toward (1) fuel costs, both for transportation and heating and / or (2) the increased cost of food and other basic necessities as a result of shock in refined fuels.  This income will be unavailable for consumer spending in our credit / debit based economy and will possibly send the US economy into recession or worse.

I realize that many economists will present the "Pollyanna" picture so as to not disrupt the status quo, but what are the more realistic (or truthful?) economists saying?

And I guess maybe a more important question is this:  will we as a society use the potential of this event to change our attitudes and actions toward energy, particularly oil before it's too late.  Or is it already too late?

Drew, you ask a lot of the same questions I've been pondering the last few days, particularly with respect to the longer term consequences.

I think that the US economy better be able to withstand $3 gasoline, or learn how to do it in a hurry.  My hunch is that gasoline prices will ease a bit over the next few weeks, but not substantially.  The oil and gasoline swapping that's being publicly talked about is, I think, aimed more at calming the market in the short run than fixing any supply problems.  But once we get into the annual Spring price run-up in 2006, things could get a lot more interesting.

Another thing we all have to keep in mind, which you alluded to, is that the US economy is frickin' HUGE, so things like energy cost increases take quite a while to work their way through the system.  If gasoline, diesel, and jet fuel prices stay at about their current level, then we will indeed see price increases in virtually everything.  Energy-intensive goods and services (overnight package delivery, airline tickets) will rise a lot more than some other types of product, and could trigger some really nasty economic effects (like bankrupting a couple of airlines and putting thousands of people out of work).

Will we learn from this event?  Who the hell knows.  That really is the most important single question (aside from anything related to the humanitarian effort on the Gulf Coast, of course), but it's so tightly interwoven with market psychology, politics, economics, and who knows what else that even a prediction-loving economist like me won't take a guess.

A perfect storm of price woes would see the impact of higher overall energy costs rock the consumer faster, with persistant:

  • higher gasoline
  • higher heating oil (almost a given this winter)
  • higher natural gas (on track to make a record this winter)

Suddenly you've got "average" folks paying 200 - 400 - 1000 more for transport fuel and 30 - 70 - 100% more for heating costs.

Each winter month.

There's an interesting effect when everyone starts paying more for fuel. Most people would say that this is inflationary, because businesses have to pass along their increased costs. But I've also seen analysts say it is deflationary: because people are spending so much on gas and heating, they have less to spend on other areas, so businesses can't raise prices.

I know most people around here don't care for economics, but it is interesting to know that economically, expensive energy is neither inflationary nor deflationary. Instead, it causes rather complicated changes in the price of items. Generally, everything in the economy has a certain percentage of its costs associated with energy. Some things have a relatively low percentage of their cost being due to energy, like, say, hand-made quilts. Other things have a high percentage due to energy costs, like airline tickets. What will happen when energy increases in price, if the money supply stays roughly constant, is that high-energy-percentage items will get more expensive, while low-energy-percentage items get less expensive. Items that use exactly the average amount of energy as a percentage of costs will not change in price.

It's not always obvious to the non-expert which items use more or less energy than average to make. But this is what will determine whether the prices for those items rise or fall.

This is why we see these contrasting analyses, some predicting inflation and some predicting deflation. It depends on which kinds of goods and services the analyst is focusing on.

Unfortunately for me, just about everything in construction requires energy to ship and install.  Even moving the soil requires heavy equipment.  I have found that high energy costs scare clients into either canceling construction projects outright, or putting them on indefinite hold.  

Back in the 1900s, someone told me that hard times were good for restaurants, because folks would go out more to cheer themselves up.  I'm working now and I can't afford to eat out.

You're neglecting that the lady making the hand-made quilts lives in a house made out of concrete, long-hauled timber, steel, etc, drives a 1985 Buick with lots of embodied energy and which gets 18 to the gallon, etc, etc. If she doesn't charge more for her quilting labor, she's going to have to cut back on her lifestyle. She will charge more if she has pricing power (eg after some other quiltmakers go out of business), and otherwise her sector will just contract until it does have pricing power and can then join the inflationary trend.
I would be cautious about using the "perfect storm" line--you can always imagine a worse, and therefore more perfecter, situation.  (E.g. in our current situation, as you accurately describe in your three bullets, a terrorist attack blows up key Saudi production facilities or blocks the Strait of Hormuz, the highest volume oil shipping lane/bottleneck in the world.)

Can you elaboprate on the "200 - 400 - 1000" comment?  Are you really talking additional dollars per month just for transportation?  If so, please explain where those numbers come from, as that kind of money buys a lot of miles in absolute terms, let alone as an additional cost.

I agree with all of above posts. And this morning on NPR there was a spot in the Marketplace section of Morning Edition that a British 'insurance underwriter' (not sure on title) was estimating that the actual cost of cleanup and rebuild after Katrina might be closer to 50 billion.  Substantially higher than previous estimates of 15-35 billion.  

On same NPR spot they talked about increased costs of lumber, steel and concrete on the mercantile exchanges.  This will add to the cost of reconstruction and hurt the existing housing market.

Anybody else hear this spot and can get the link?

All of this points to a rocky economy this winter if true.

Maybe a dumb question, but isn't there a relationship bewteen the propane and NG markets?  I know there is a relationship, but am unsure of what the outlook is on propane?
I believe they are only slightly related, in the same way oil and NG prices are related as energy sources.  Propane is a by product of oil refining, while natural gas is not.  The market for propane is well supplied as a result of the increasing use of oil.  At $1.10 per gallon, it may be one of the better energy deals...
Open (but related to the topic) question:

Is actual black gold (oil) moving from the SPR?

From the SPR website I found that oil will be delivered "according to the terms of the sale" and "no more than 30 days after the President signs the order".

Wikipedia for the SPR said oil would begin moving "13 days" after the President signs the order.

So they've agreed to the sale, but have they actually delivered any crude?  Does anybody know?  I tried google but only found non-specific news articles about the sales.


Here is another question:  

Does anyone know where Europe's strategic reserves are located.  Apparently it's both crude oil and fuels.  What country(ies)?

I have to admit I even didn't know that Europe had something similar to SPR until IEA's announcement last week.

The four U.S. SPR locations in Texas and Louisiana take advantage of the region's geology (salt domes) for storage.  I do not think such formations exist in Europe -- so it must be high capacity tankage.  Anyone have any details?

The strategic reserves are located in Belgium, the Netherlands, Luxembourg, Denmark, Sweden, Finland, France, Germany, Britain, Italy, Portugal, Denmark, Austria, Greece, Ireland and Hungary.

Note these reserves are not like those of the US. US reserves are of crude oil. European reserves are refined, ready-to-use products, like gasoline, Diesel distillate, heating oil and jet fuel.

Damn. I accidently hit the Post button instead of Preview. The SPR is held in tankage, not in geological formations. It is supposed to provide a 90 day supply, but I don't know what volume this represents.
Although this Simmons and Company PDF from early 2003 does not identify where the non U.S. storage sites are located it does provide inventory levels for the U.S., Europe and Asia.

I was surprised to learn that over 50% of Europe's 346 million barrel reserve is in the form of refined products.


Just to give you an idea on gasoline prices in Europe:

In early August, prices for unleaded 95 Octane were about 1.24€ per litre in Italy and 1.28€/l in France. 1.28€/l is about $6.05/gal.

Yesterday, the French MSM reported prices of 1.58€/l. That works out to $7.47/gal at today's exchange rate.

Somehow, I don't think the Europeans are going to find the joke about exporting gasoline to the USA very funny for very long.