The Coyote Time Confluence

There is no nice way to put it - times are about to get rough. In February 2022, Russia announced the start of its "Special Military Operation" in Ukraine - essentially launching a war without the paperwork. Western countries are cutting ties from Russian oil with the Russkies reciprocating by drawing down two major gas pipelines in Europe, putting upward pressure on prices. The US rolled out stringent sanctions, pulling Putin's petroleum products out of domestic markets. It was in that moment, when the first Russian tank entered sovereign Ukrainian land, the West drove off a cliff and didn't look down like Wile E. Coyote.

By Summer, regular unleaded gas was over $5/gal for most of the country. There was a huge public outcry. Many experts believe civil unrest becomes inevitable above $5/gal with higher rates of catastrophe and frequency being directly correlated to the price of fuel. All was not lost, though - slowly but surely, the price came down. In the time since the peak, costs have fallen more than 20% to sub $4 with the US average around $3.70 at time of writing. So that's it right? Crisis adverted. Bullet dodged. Hurricane avoided.

Chimerical abnegation. (read: No.)

Throughout the year, neither US nor OPEC oil production reached pre-pandemic peaks. If removing Russian oil from the supply caused the increase and it wasn't replaced, what caused the subsequent drop? At the end of  March, the Biden administration started releasing barrels of oil from the US Strategic Petroleum Reserve (SPR) at a rate of 1 million per day. This didn't gain traction in the trades until late April. By July, when prices were near their highest, leadership must have been unhappy, and they made the historic decision to release 20 million barrels in a single day.

Let's back up a moment and talk about the US Strategic Petroleum Reserve. Since 1982, the SPR has been a core security blanket in times of emergency. The well-founded thought was that should a threat to America's fuel supply arise, we would be able to give ourselves more time as a nation to figure out how to acquire more. If the Reserve were topped up, it would hold slightly more than 725m barrels - that's if it were full; however, it was only at 81% capacity at the end of 2021 with around 588m barrels in store. The US uses around 20m barrels a day, but it produces 12m b/d. So in theory, should something strike our imported supply, we could carry on normally for around 90 days without making any changes. But it gets a little more complicated than that. 

For starters, the SPR houses two different types of oil; light sweet (used for gasoline) and heavy sour (used to make diesel).  Only about 40% of those 588m barrels is light sweet, and light sweet makes up roughly 80% of the 1m bbl/day being released. That means in January, we had 235m barrels of the good stuff (for us consumers/civilians), and 800k barrels were released daily starting on March 1st with 16m barrels released in July, so around 180m are gone, leaving us with 55m left today. The original plan was for this to run for 6 months, which would end on August 31st, but, oddly enough, the SPR didn't close its doors when September began. The EPA site now says the order expires on October 31st, 2022, and something tells me it might stay open for a week and some change after Halloween. 

Here, we have the first factor of confluence: the midterm election. Biden had to do something. He was getting hammered in the polls. There was quite a bit of violence throughout the summer, and people were calling for action. I do agree something had to be done, but by the midterms, we will have dwindled our supply down to 6m barrels. At the current rate of dispersal, we could last about a week. If something were to happen to our supply chain - which is unlikely but possible - we could exhaust our reserves in as little as one day. At any rate, the SPR will shut the flood gates at the end of October or shortly thereafter. It's currently supplying 5% of the oil in the US market, so by the time the ballots have been cast, expect a rise at the pump.

Then we have the second factor of confluence: Winter is coming. Typically, consumption somewhat wanes in the final quarter of the year before it begins to rise after the New Year is rang in. There's no reason to believe this won't happen in 2022, but with the SPR's petroleum coffers looking rather bare, the US will have to restock, thus the supplier becomes the buyer, driving prices higher.

The third point of confluence is Europe. The EU got addicted to cheap Russian oil, and they're paying a steep bill for it now. In Germany, energy prices have increased by 140%, and its Chancellor has said that while the country's reserves are over 90% full, they will be entirely empty by the end of winter. That bill is about to incur further surcharges because the whole European trading bloc has pledged to entirely stop buying Russian petroleum products by the end of the year. This means they'll be buying from the same places we do, increasing our prices further.

With the SPR transitioning from distribution to procurement and Europe sourcing its energy needs from the same place we purchase our provisions, we're poised to pay more at the pump as consumption increases through the early months of 2023. It's not unreasonable to think prices could go as high as $6.25/gal as we roll in to the next summer.

That's if everything stays the same. The 20's have been far from predictable, and there are any number of possibilities that could drive prices up or down. If the Russians use a nuclear weapon or if they attack another country, prices will assuredly go up. If China invades Taiwan, the need for oil will go up. If someone goes full retard and attacks the United States, Uncle Sam will send the boys to liberate them of life and drive oil prices up. 

Concurrently, US leadership is working to drive those prices down. How effective their efforts will be remains to be seen, but they know none of them are likely to keep their jobs if their constituents can't get to work. Production could increase, demand could be lower than expected, or deals could be struck to increase supply. Obviously, the government has access to more information than someone in the boondocks of the Midwest, and their self-interest and incentives align to keep prices as low as possible.

As the Russians continue to fumble the special military operation, their allies become less confident of their overall victory. If it doesn't look like they will win, tenuous allies like Saudi Arabia will be less willing to bet against the United States. Putin's goals were to stop the expansion of NATO, gain territory, and challenge the unipolarity of  US control over the globe. In the long term, he will have zero to middling success on any of them. If anything, he has dramatically weakened his position by playing his cards too early, and frankly, not well enough. The "second largest military superpower" is getting its ass whipped by a bunch of Ukrainian roughnecks with 1990's US technology.

*edit* During the course of writing this article, it appears the Nord Stream 1 & 2 pipeline pair was attacked by currently anonymous saboteurs. The Russian Duma will likely accept the results of the sham referendums held in Ukraine on Friday, further destabilizing the region and ensuring this conflict will carry on. The US has committed to send 1 million barrels per day of oil to the EU to aid our allies during this energy crisis. There’s no official statement on where that’s coming from, but one can only guess a portion of it is coming from the SPR. Europe does have a penchant for using more of the sour heavy petroleum compared to us Americans, but this will further strain our already dwindling reserves. 

Each of these markers represents a brief fraction of a second before Wile E. Coyote realizes his mistakes, and when they all factors converge, the Coyote comes crashing down. These events are easily predictable, previously stated by Western governments, and seemingly unavoidable - these will happen. But there is still so much to unfold. From rising interest rates, massive layoffs, pending military responses, and a serious likelihood that a nuclear bomb will be used on the battlefield for the first time since Nagasaki, the amount of crises piling up are all going to come together through the end of this year and into the next.

So either don’t look down and let the fall take you by surprise, or prepare with a parachute.

Take care of each other.

-The Hillbilly Analyst