What’s wrong with reducing government spending? That would free up more debt service at current tax rates and also probably help the economy in the short to medium term. I guess your point must be that reducing government spending would not increase consumer spending and so be a drain on the economy, at least short term.
To lower corp and household debt, I think you can just leave interest rates high for longer, right? Encourage savings and investment, discourage debt.
On the SPR, the runup in CPI was tempered somewhat by Biden dumping like half the SPR into the market over 6 months before the elections. Presumably they’ll be some kind of an opposite but more drawn out impact to refill it.
SPR: I infer that you do not mean buying oil futures, but rather intend to do this by taking delivery. So that means you want to store oil. I’m no expert, but the cost of carry has to be noticeable. There’s the financing cost and then the storage costs. Do you have the carry costs handy…like per month? My guess is it’s a losing proposition. Ultimately a net drag on productivity.
Now if you are someone with the capacity to store another million barrels of oil somewhere, I can see why the idea is appealing. But I don’t get the positive impact to the economy overall. Just buying insurance on the chance that the military runs out of oil? That is a valid argument, I grant. But economically, it’s just another cost.
And by all means, stop making dumb investments with government money. I’m already on record saying that widening highways and SR1 zoning regs encourage bad investments. But the alternative to cutting expenses is to look at more promising ways to solve the targeted problems. That’s the mindset we will need to effectively deal with climate change, imo. Prolly a whole list of others…education, both primary and college, comes immediately to mind.
Let’s show a little ambition, like back in the day.
Yes, physical delivery of oil into the SPR caverns to replace the physical oil that was removed and sold. I take it you’re not very familiar with the SPR. More than 180m barrels were removed and sold in 2022 to temper prices pre-election, putting the SPR inventory at its lowest levels since the mid-1980s. This was, of course, in the face of an increasingly hostile OPEC+.
The point is that the SPR should be refilled, which has some economic impact on prices, just like it did when it was being sold off.
The trade is military security for money. We pay money and receive an oil reserve in case the military needs it. Got nothing to do with inflation. Did the release drop gas prices?. Sure it temporarily did. Would replenishing it put upward prices on gas. Sure it would. But the trade is simply security for cash. Before making a trade, be clear on the price. Nothing deep or profound there.
It’s not crazy. The lesson of WWII was that a modern military cannot function without petroleum. When the Japanese had to use kamikazis because no fuel rendered the planes worthless and the German panzers ran out of diesel…end game. So it makes good sense to avoid running out of fuel. Logistics wins wars.
The oil was sold at average of around $95. The administration set a target around $72 to refill. Market prices recently spent two months at or below that range but no refilling occurred. Just in the past week, 1m of the 180m were refilled at prices well higher than the target. Nothing deep or profound here. The expert traders telegraphed their intentions then missed their window to buy. So I wouldn’t be so sure the trade is security for money. Potentially the US (not the current administration) will be giving away both.
So you’re looking at the SPR as another tool in the shed when fighting inflation. At least the cost of petroleum. Fair enough. But that leaves me wondering why the need to take physical delivery. Just use the futures market to simulate a synthetic call option on petroleum? That’s what the leading experts do all the time. Easiest place to see that is how airlines hedge fuel costs. Since the airlines has to settle on ticket prices well before the fuel is actually burnt up, they lock in the cost using financial instruments. They don’t buy up the jet fuel and store it somewhere. Way to much “cost of carry”.
So what is the cost of carry in your estimation. It’s a reasonable question, no?
Well the cost of carry is certainly relevant, but having physical possession of the oil is a security thing, I think. So the cost of carry should be classified as a security cost whereas the price at which oil is added to & subtracted from the SPR would be more of an economic measure, I think.
Also, how much is the marginal cost of carrying an extra 180m barrels of oil given that we are already carrying 350m barrels? I’m guessing the cost of carrying 530m barrels isn’t that much higher than the cost of carrying 350m barrels.
This is well outside my area of expertise though, so conceivably I am thinking about this all wrong.
Pretty much dead bang. I’d guess the carry cost per barrel is pretty stable. Like grains, I imagine.
Storage capacity is likely a bit tricky. Although I’d bet heavy that if Exxon announced they were building a storage facility for 10mil bbls of crude about 500 yards from your driveway, you’d scream bloody murder. And if you imagine one giant storage facility, then you haven’t thought it thru. Gotta be multiple sites. The interest cost (liquidity) prolly scales inversely. The more you borrow, the higher the rate. But that doesn’t come into play if it’s the Fed govt.
Oh adding new capacity is expensive, no doubt. But the SPR is currently pretty low by historical standards. I don’t know a lot about it but I assume that means there are one or more facilities that already exist and have excess capacity. The SPR has at times exceeded 700m barrels and is currently at 350m barrels (in round numbers). Adding an extra 180m barrels would still leave us well short of where we used to be.
I’m assuming the federal government didn’t sell off the storage facilities???
I suppose failure to maintain is possible… but did that actually happen?
I’m quite certain of this and why I didn’t address the storage cost component. The caverns have to be maintained whether they’re half or totally full and I have trouble imagining the marginal cost of keeping it full is significant, ie the fixed cost is the main component. My understanding is that individual caverns are occasionally drawn down to allow for individual maintenance as well. I believe there is also some risk in keeping them too empty for too long as the caverns can collapse and spoil the remaining inventory. It would be pretty stupid to draw them down halfway, not refill in a timely manner, then have a significant portion of the remaining spoiled.
Are you saying reducing current government spending would free up more money for the government to service their debt? That would need to be quite a bit of reduction just to get down to the point of not running a current deficit before any non-borrowed money would be freed up, wouldn’t it?
The US govt budget was 1.375 Trillion Dollars. If you shut down the entire military you would still have a deficit of 500 Billion Dollars. In Summary, cutting spending alone is not gonna balance the budget.
In total we just passed $90 trillion in 2021.HOLY DEFICITS, Batman! Even at 5%, that’s close to $5trn of debt service per year. With a current GDP of $25trn, it’s going to use 1/5 of that output to service debt.
You would need significant spending cuts and it’s seemingly impossible to solve the problem this way alone, but certainly spending cuts are a part of the solution.
You can’t cut the military, or medicare, or social security. Just assume cutting funding for meals on wheels fixes the problem. Then cut taxes again to stimulate the economy.