On Tuesday, the U.S. Senate voted, 97-1, to authorize a halt to any further additions to the Strategic Petroleum Reserve. President Bush plans to veto.
Last week, How the World Works confessed that it agreed with President Bush's assertion that halting purchases of oil for the SPR -- or going even further, and releasing part of the stockpile -- would have a minuscule impact on the global price of oil. Seventy thousand barrels of oil are added to the SPR every day -- not even a drop in the bucket when compared to the daily global consumption of 85 million barrels a day.
But today the Economist blog Free Exchange points to a post by energy expert and former oil trader Geoffrey Styles that adds considerable nuance to the discussion.
Styles' argument focuses on the fact that the futures price of a particular blend of light sweet crude, West Texas Intermediate (WTI), traded on the New York Mercantile Exchange, is the current benchmark upon which a large proportion of global contracts for oil delivery is based. When we hear, as we did today, that the price of crude fell one dollar in trading on Wednesday, what is usually meant is that the price of a barrel of West Texas Intermediate to be delivered in June fell one dollar.
And that's where it gets interesting:
The typical structure of an oil deal now involves an agreed premium or discount to the prevailing WTI price over an agreed period, often related to the time that a cargo of oil is loaded, or a pipeline shipment delivered. So while the global oil market has expanded to some 85 million barrels per day (MBD), with US refineries consuming on average 16 MBD of that, the price for a surprisingly large proportion of those barrels is set by a domestic light sweet crude futures market that is backed by only a few million barrels per day of physical oil: the domestic oil production and suitable imports connected by pipeline to the Cushing, OK delivery point for WTI...
...What really counts is the Mid-continent light sweet crude system, consisting of pipelines going into and out of storage at Cushing, serving a number of inland refineries, including five sweet crude refineries in Oklahoma with a combined capacity of 0.5 MBD. Thus, while the volume of "paper barrels" traded on the "Merc" can mount into the hundreds of millions of barrels per day, the physical market underpinning them is orders of magnitude smaller.
And U.S. policy toward the SPR could conceivably affect that much smaller physical market. Styles says that 58 percent of the oil added daily to the SPR consists of various grades of sweet light crude. It may be a piddling amount compared to total global consumption, but it is significant compared to the total daily production of WTI. So halting the inflow would be a "lever with which to nudge the balance point of the physical WTI market," and possibly alter the "speculative logic" of global oil markets.
Not by all that much, Styles hastens to add, but perhaps by enough to make it worth doing, in the short term.