US President Joe Biden and UK Prime Minister Boris Johnson at COP26 on Nov. 1. In the days before this Biden implored OPEC to increase oil production. Three weeks later, both Biden and Johnson opened up their strategic petroleum reserves. Photo via UK government

 

307 days. That’s not even a year. That’s precisely how long it took from the day President Joe Biden was sworn in, when he cancelled Keystone XL, until the day he opened up the United States Strategic Petroleum Reserve.

What the heck is that?

The U.S. Gulf Coast near the Texas/Louisiana border is home to the U.S. Strategic Petroleum Reserve (USSPR). It was set up in the mid-1970s after the Yom Kippur War led OPEC nations to use the “oil weapon” and embargo exports to nations which supported Israel in that war. That was likely the largest shock to work oil markets since the Second World War until the COVID-19 crisis hit.

The USSPR is stored in underground caverns in large salt formations. There, it is safe from pretty much everything, including nuclear attack, which used to be a significant consideration.

The USSPR is hosted in just four locations, all of which use salt caverns to store a combined total of 714 million barrels of oil. As of Nov. 19, it held 604.5 million barrels. They are releasing 50 million barrels into the market.

This reserve is very much an “Armageddon”-type reserve, able to sustain the U.S. economy during times of crisis like embargos, war, or hurricanes.

This is one of four sites of the U.S. Strategic Petroleum Reserve, at Iberville Parish, Louisiana. It has six caverns with 71.8 million barrels of cavern storage. Source: US DOE

But are the drumbeats of war beating? Is there a massive hurricane about to shut down Gulf Coast production? Are nuclear warheads about to rain down over the North Pole?

Nope. Americans are pumping gasoline into their gas-guzzling SUVs and pickups that’s just a little more expensive these days. That, apparently, accounts for world-ending measures.

And it’s not just the U.S, either. China, India, Japan, South Korea and the United Kingdom are also making releases from their respective strategic reserves.

Again, is there a war I didn’t know about? Isn’t the pandemic just about over?

CNN on Nov. 23 swooned about how “gas prices are at a seven-year high.”

But what are those gas prices?

According to AAA, on Nov. 23, the state average for California was US$4.705 per US gallon. (Note, a U.S. gallon is 3.785 litres, where as an Imperial gallon is 4.54 litres. I’m going to use US gallons here.) It’s $4.352 in Hawaii, $3.974 in Nevada, and $3.877 in Washington. You can see them all in this pdf. AAA Gas Prices Nov 23 2021.

That level is significant, because at $3.783, gasoline in Oregon is less than $1.00 per litre. That means gasoline, in every other state – all 46, is less than a buck a litre.

Now, there is a dollar conversion here, so that works out to $1.27 Canadian. Boo hoo, my heart bleeds. The last time I filled up, it was $1.429 per litre.

So what we, today, would consider a relative bargain for gasoline in Canada, the Biden administration considers serious enough to open up war reserves.

Let’s not forget gasoline taxes. California, with the highest price, also has the highest gasoline tax. On July 1 of this year, it raised gasoline taxes to 51.1 cents per gallon (13.5 cents per litre). Federal gas taxes in California are 18.4 cents per gallon (4.9 cents per litre).

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In Canada, in addition to every tax under the sun applied to gasoline, we pay a carbon tax, and Gouging and Screwing Tax on top of that. For 2021, that carbon tax is 8.8 cents per litre, based on a $40 per tonne of CO2 equivalent carbon tax. If the U.S. had a carbon tax at that level, it would add 33.3 cents (Canadian) per US gallon, or 26.2 US cents per US gallon.

This tells me one thing very clearly.

While Canadians will suffer under the increasingly inflationary carbon tax, there will never be a carbon tax in the U.S. Most certainly, they will not have one that will reach $170 per tonne in 2030. At current exchange rates of 1 CAD = 0.786525 USD, that would mean a US$1.114 per US gallon carbon tax in 2030. The U.S. Army would be calling up the reserves and invading Saudi Arabia or Venezeula (which is closer and easier to attack, but harder to develop its oil) before letting that happen.

Now, let’s be clear – if Biden had not cancelled TC Energy Keystone XL as one of his very first acts in office, before he even attended his first inaugural ball, that pipeline would not have been completed and gone online by now. And in the interim, the Enbridge Line 3 Replacement has gone online, substantially increasing our ability to ship oil to the U.S.

But it isn’t lost on anyone in the Canadian energy industry that Biden has been calling for OPEC to increase production by almost exactly the capacity of Keystone XL. And OPEC basically told him to pump it himself. Apparently, they’ve found religion with regards to higher oil prices means more revenue. After seven years of shooting themselves in the foot with low prices, they need to refill the piggybank.

And what about US oil production? Arguably one of the most significant achievements of the Donald Trump administration was the ability to declare the U.S. was now energy independent – a dream ever since the necessity of the U.S. Strategic Petroleum Reserve became evident in the first place.

Does anyone remember the heady days of Texas oil production surging? Do you remember hearing about how the Wolfcamp formation in the Permian Basin was going to change everything?

Well, a funny thing happened. The ESG (environment, social and governance) zealots in the investor community grabbed it by the throat, and put its knee on U.S. production.

Don’t get me wrong – the business model of drilling like crazy with the sole goal of increasing production numbers, spending every cent on drilling instead of investor returns – was unsustainable and foolhardy. The markets finally snapped back and said they want oil producers to show them the money, in dividends and share buybacks.

But the ESG movement has also been focused on starving oil and gas development of lifeblood capital. No capital means no new drilling, or at least dramatically reduced drilling, and fracking.

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This past spring I took part, virtually, in the Williston Basin Petroleum Conference, an event I’ve been covering in excruciating detail since 2009. This time it was the North Dakota’s turn, and they held it in person in Bismarck. During the last Bismarck event, I might have heard “ESG” mentioned in one or two presentations. Now, it was in nearly every single one. You couldn’t swing a dead cat without hitting someone talking about ESG.

ESG is, in many ways, an evolution of “social license.”

Depending on who was speaking, the term was either referred to with derision, grudging acceptance, or something in between. Wade Hutchings, chief operating officer with Calgary-based Enerplus, said, “Now that five-year plan and, in fact, our entire corporate strategy is informed, and in fact a guided by our ESG program. So in 2019, the company converted its past efforts in corporate social responsibility programs into an ESG framework.”

“I know I got pretty cheeky with that ESG slide, but that is that is the world we’re in right now you have to have a very robust ESG program and be able to have a lot of transparency around it, and reporting around it in order to be considered for capital. But I do see things improving,” said Dave Keanini, president & CEO, Outrigger Energy II LLC, a midstream gas processing company.

Bob Phillips, CEO and chair of midstream operator Crestwood, said, “The one thing that I’ll probably hammer home more than anything else is the importance of ESG competitiveness, to keep the Bakken in a competitive basin with other basins out there. And all the speakers, as I’ve observed them, have had different forms of ESG policies and practices. But we, as an industry, need to embrace this on a formal and institutional level and really put out to our investors and to the market and to regulators, all the things that we’re doing from an environmental, social and governance standpoint to improve their view of our industry and that’s the real reason for doing that.”

So, everyone in the business is on bended knee before the altar in the Church of ESG.

But what as been ultimate result?

On March 13, 2020 when COVID-19 hit, and Trump was president the United States was producing 13.1 million barrels per day. Now, on Nov. 12, 2021, with Biden as president, its production is 11.4 million barrels per day, a drop of 1.7 million barrels per day.

U.S. oil production up until November, 2021. Source: EIA

 

In June 2018, the U.S. had 503 frac spreads at work. But when the Permian lost its lustre in the eyes of investors, as mentioned above, huge numbers of frac fleets were parked. Some companies started cutting up large portions of their iron, hoping to improve pricing by reducing the size of the overall fleet. Well, those chickens have come home to roost in several ways. Now. As of Nov. 19, the US had 270 frac spreads at work.

Biden’s crying for more oil. But is there the industrial capacity to ramp up American production? It might be hard, with all those frac pumpers cut up and melted down. And will the Church of ESG allow its adherents to pump capital back into American oil production again?

If candidate Biden was willing to “transition away from the oil industry,” now President Biden is getting it.

How’s that working out for you, man?

 

Brian Zinchuk is editor and owner of Pipeline Online. He can be reached at brian.zinchuk@pipelineonline.ca.

 

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