Americas News
Trump Reserve Selloff Proposal Raises Security Concerns but Backed by Analysts Who Forecast Oil Demand Plummeting
Is U.S. president Donald Trump's proposal to sell a portion of America's oil reserve putting that country at risk or a wise move at a time of rampant overproduction and an uncertain market future?
That was the question analysts were debating Tuesday in the wake of the brash billionaire announcing in his first complete budget that selling 260 million barrels of the 687.7 million barrel Strategic Petroleum Reserve would raise $500 million in 2018 and as much as $16.6 billion over the next decade.
Trump also proposed raising $1.8 billion over the next 10 years by making the 19 million acre Arctic National Wildlife Refuge open for oil and gas development, and raising an additional $3.56 billion over the same time period by cutting payments Gulf Coast states collect from offshore drilling near their coastlines.
Trump stated that the impetus for these and other pro-energy proposals was to begin making a dent in the U.S.'s multi-trillion dollar debt; but while the announcement may have been music to the energy industry's ears, analysts lost no time voicing their concerns.
Carl Evans, senior crude oil analyst at Genscape, called the reserve selloff proposal "A bit concerning: you're reducing the government's budget deficit, but you're putting more risk onto the consumer ... who is going to pay for it.
"It does seem like a short-term cash grab."
Jason Bordoff, director of Columbia University's Center on Global Energy Policy, warned that if a supply disruption were to occur, depleted reserves would mean "prices at the pump will spike; the national security asset of the SPR helps provide a cushion."
Countering the argument of Mick Mulvaney, the director of Trump's office of management and budget who told media that the national security risk "goes down dramatically when we have increased production like today", Bordoff argued that "It would be foolish to sell it off because of a domestic oil production boom, the longevity of which remains somewhat uncertain."
For the record, the current reserves would provide 149 days worth of the U.S.'s import needs during a crisis.
But purely from a financial perspective, the average price paid for oil in reserve was $29.70 per barrel, and selling at today's price of about $50 would earn a tidy profit and be a wise move considering so many experts believe oil could easily drop to the $30s due to the failure of the Organization of the Petroleum Exporting Countries (OPEC) to reduce the global glut or dissuade rogue nations from pumping full-out.
Plus, Michael Dei-Michei, head of research at JBC Energy, pointed out there are costs associated with maintaining the reserves and that "It makes a lot of sense for the U.S. to reduce these rather massive holdings."
Tony Seba, co-founder of RethinkX, also agrees with Trump's plan, but from a different perspective: he told CNBC that "oil demand will peak in 2020/21 and go down to about 100 million barrels and go down to 70 million barrels within 10 years; essentially what that means is that the new equilibrium price is going to be $25.
"So if you produce oil and you can't compete at $25, essentially you are holding stranded assets."
He added that deep water operation, Alberta's oil sands, and U.S. shale along with associated pipelines and refineries will be among those stranded.
Robert McNally, founder and president of The Rapidan Group, is among those who foresee oil prices plummeting in the near-term: earlier this month he warned that recent market rebounds are of no significance and that even if OPEC extends its cuts, we are likely headed for crude prices at the low $30s.
