How to Trade Oil like the Pros (Government Edition)

The US Government hit their $70 Strategic Petroleum Reserve refill mark perfectly this year. So far netting about $4 billion in profit from selling at the peak.

Which forces this question to be asked... has the US government historically been a competent trader of oil?

Logic would say they should be the most competent trader of oil.

The Biden administration clearly stated they would begin refilling the SPR once oil hit $70, and then 7 months later oil hit $70. Many vocal oil pundits and traders were certain oil wouldn't hit $70 for years.

Between the US intelligence organizations (CIA, FBI, military), the IEA, a highly connected network of government officials, and the most complex and sophisticated set of satellites known to man, the US government should have the absolute best information available, answering questions like:

• How much oil is being consumed?
• What countries are pumping less? More?
• What countries need to pump more out to satisfy their government budgets?
• Where are oil tankers loading, transferring to other ships, and offloading?

Revealed in the Brent Scowcroft Papers that were released in 2012, one particular example from the 1970's comes to mind.

These papers detailed all the communications and memos of Brent Scowcroft during his time in the United States government where he served in high ranking intelligence roles for over 20 years, 8 of them as National Security Advisor in the Nixon/Ford era.

One memo from November 13, 1974, recorded between William Simon, the architect of the 1974 Petrodollar agreement with Saudi Arabia, and Secretary of State Henry Kissinger being just one acute example:

See, in the 1970’s Peak Oil theory was all the rage.

In 1956, M. King Hubbert published a peak oil theory for the American Petroleum Institute and correctly predicted (for a time) that US oil production would peak in the 1970’s.

For the 1900’s it did, in fact, peak in 1970.

In 1972, Limits to Growth was published, caught fire, and fanned the flames of peak everything production, not just oil production.

But world oil production did not peak. Nor was peak production the cause of the oil price spikes of the 1970’s. The cause of the price increases was largely…

1. A demand problem where the number of cars on the road had increased by 1,500% since the end of WWII.

Europe alone went from 3 million cars in 1952 to 46 million in 1972.

Annual US car sales doubled from 5.1 million in 1952, to 11.4 million in 1972.

2. A pricing structure problem as OPEC discovered its true pricing power and wielded it. The first unilateral OPEC price increase happened in December of 1973, doubling the price of oil from two months earlier.

(The Arab Oil Embargo was just the final, most-visible thrust from 13 years of major changes in the oil global market)

So while the world and US worried about peak oil, the top people in the White House simply viewed the oil market as being temporarily tight, keeping a birds eye view on potential incoming supply. Simon and Kissinger were on the exact same page with the observation (intel) that new supply would come onto the market.

The North Sea (UK/Norway) and the North Slope (Alaska) were hard projects that required higher oil prices to be economical. As prices rose, those projects picked up steam. As the trope goes, high prices are the cure for high prices.

They were early by two years. But it did happen and after the unilateral price hike by OPEC in December of 1973 the price of oil remained flat for the next five years as new production did come online around the world.

By 1977 the North Sea was producing almost 2 million barrels per day and Mexico was producing 1 million.

The North Slope in Alaska took a few more years to come online, but ended up being the largest field in US history and contributed 1.5 million barrels of oil per day in 1981 and 2 million by 1988.

The US made about $4 billion on the recent SPR oil sales, selling high and now buying low.

Was it luck bailing out hubris?

Given the information advantage and the importance of oil to things as critical as the US Navy and Air Force you have to imagine that the US government has some very bright people and key technologies keeping an eye on all things oil.