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Tapping the reserves 🛢
Last week saw the release of two different liquids held in two different strategic reserves. Countries around the world maintain strategic reserves for some of the same reasons that households set aside money in savings accounts for rainy days. If things are a little tight, you can tap into your savings and help smooth out your consumption. When times are good, add to your savings. This is a popular enough concept that it has its own name: consumption smoothing.
Countries take the same approach when attempting to manage resources that are important to their own economy. For the US, that means maintaining a stockpile of oil along the Gulf of Mexico. In Québec, Canada it includes a warehouse full of maple syrup. Both countries saw low production levels this past year and have decided to release some of their reserves in an effort to lower prices and increase consumption. This is a clear example of increasing supply, but will it work?
Strategic Petroleum Reserve
Last week, President Biden announced the release of oil from the Strategic Petroleum Reserve in an effort to lower price and address a perceived lack of global oil supply. The US isn’t alone in this decision. Japan, China, India, South Korea, and the United Kingdom all announced they would release oil from their strategic reserves as well. While the announcement is making headlines given the size, it represents only about 2.5 days worth of US consumption. Oil prices have been falling for the past few weeks, but gasoline prices have remained relatively flat over the same time period. Here’s a look at how oil prices (per barrel) and average gasoline prices (per gallon) have increased relative to their prices in November 2020.
As oil prices increase, gasoline prices have generally increased as well. The main issue over the past year, however, is that when oil prices have fallen, gasoline prices have remained stable. Once oil prices increase again, gasoline prices increase as well. Pundits have predicted a release of petroleum reserves for the past few weeks, and markets responded to the announcement with a temporary increase in oil prices instead of a decrease in prices. At the end of last week, oil prices finished below $70 per barrel.
The newly released supply, however, isn’t likely to make much of an impact on gasoline prices. Before the shale boom, high prices could be blamed on OPEC or on Russia, but the US is now one of the leading producers in the world. This has led companies to focus on returning profits to their investors. Clark Williams-Derry, an energy finance consultant at the Institute for Energy Economics and Financial Analysis, had this to say to NPR:
Oil prices are now in the hands of producers. Their incentives are all aligned to keep prices high. And that is going to create some real pain for consumers.
President Biden has also asked the Federal Trade Commission to look into whether large oil companies are responsible for artificially increasing gas prices. While it’s unlikely to have any immediate impact on gas prices, the FTC is responsible for breaking up large industry players. The investigation could provide the agency with more information on how gas prices are set in the United States. The two largest companies in the industry, Exxon Mobil and Chevron, have doubled their net income since 2019.
Global Strategic Maple Syrup Reserve
North of the border, Canada is also tapping into its strategic reserves to help stabilize one of its important exports. The Québec Maple Syrup Producers announced it was releasing about half of its total stockpile of maple syrup: 50 million pounds. Québec currently produces about 73% of the world’s maple syrup, but this year’s production couldn’t keep up with an increase in worldwide demand. Formed in 1966, the “OPEC of maple syrup” was created to help stabilize the maple syrup industry by instituting a series of quotas similar to other agricultural markets.
Maple syrup production is a seasonal process and is subject to very specific wealth conditions. This year’s short and warm Spring resulted in low yields for many Canadian producers. The reserve is intended to account for these specific instances to ensure a consistent supply of syrup to national and international markets (the US accounts for about 2/3rds of Canada’s exports). Managing the syrup industry through a reserve system also stabilizes prices and removes volatility associated with seasonal production. This is a fairly common system in Canada, in which the government regulates the supply of a wide variety of agricultural products.
Québec requires each bulk seller of maple syrup to contribute a portion of their finished product to the reserve. The producers do not get paid initially for their contribution. Contributors are only paid once the barrel is sold, which could take anywhere from a few months to a few years. By organizing producers, Québec has made maple syrup production a good business and a strong brand. As their brand reputation improve, prices of maple syrup increased as well. Eventually, as the value of maple syrup increased, so too did the production levels. Here’s a historical look at maple syrup production in the province over the past century:
Not all bulk producers like this system, however, getting caught selling on the black market could mean the loss of a producer’s entire production. In addition to those concerns, there is a serious threat south of the Canadian border. New York State alone has 3 times as many maple trees as all of Québec combined. If the US wanted to be a self-sufficient consumer, it would devastate Canadian exports. For now, though, it appears that Québec continues to focus on maintaining its dominant stronghold in their own form of liquid gold.
At the end of 2019, there was enough crude oil in the strategic reserve to match 1,069 days of the US’s net imports of crude oil [US Department of Energy]
On April 20, 2020, West Texas Intermediate crude finished the day at negative $37.63 a barrel on the New York Mercantile Exchange [MarketWatch]
The national average for gasoline in the United States is $3.39 per gallon [AAA]
The federal excise tax on gasoline is 18.3¢ per gallon and 24.3¢ per gallon on diesel fuel [US Energy Information Administration]
In 2012, more than 3,000 tons of maple syrup were stolen from the strategic reserve over the course of months [Vanity Fair]
In 2019, a barrel of maple syrup was worth almost $1,900 CAD [Quartz]