Inputs Monitor Editor Davis Michaelsen adds his perspective into the happenings of the inputs markets.
Crazytown and the Export Creeps
Mar 14, 2014
The United States has weighed in on the Russia-Ukraine conflict -- I think we can call it that now -- and has expressed its intent to explore using Strategic Petroleum Reserves (SPR) to influence the global price of crude oil lower and curtail Russia's national income. The hope is that WTI crude prices will scare Putin out of Crimea. This reeks of the kind of Jimmy Carteresque weaponized export policy that landed Ronald Reagan in office -- oh, for the days.
We have covered the fringes of this issue at length in various Inputs Monitor reports this week, and Chip and I talked about it earlier this week on Market Rally. I quoted Reagan from January 1981 who was then President elect when he said, "You have to determine whether we're having as much effect on the Soviet Union or if that's being offset by a worse effect on our own agricultural community."
In 1979, then president, Jimmy Carter canceled grain sales to the U.S.S.R. as a means of sanctioning the Soviets in response to their military actions in Afghanistan. In confirmation hearings for Secretary of Ag John Block, Block said, "I believe food is now the great weapon we have for keeping peace in the world. It will continue to be so for the next 20 years, as other countries become more dependent on American farm exports and become reluctant to upset us."
I don't even know where to start on that line of thought. At this point, when the Administration of 1980 refers to agriculture, in 2014, we can substitute that word with crude oil. With cuts in national defense spending and the National Guard, it would appear doves on Capitol Hill have little recourse but to spit seeds at Russia.
The decade that followed Carter's cancellations was a disaster for the American farmer as a direct result of Block's notion of using American crop exports as a weapon. In fact, his comment above sounds much more like Krustiev than it does George Washington.
It is the unintended consequences that concern us here. Backroom deals let grain seep out around the edges of the canceled grain sales, blunting the edge of Block and Carter's rhetoric. The result was a surplus of grain at a time when land values and inflation ran many farmers out of business.
I've still got the export 'creeps' from what happened over this winter with propane. Harvest demand was high, home heat demand was huge and LP exports topped all time highs. All of this combined to create a supply crunch that had regional governments suggesting citizens ration propane use, and raised retail prices above $5.00/gallon in some states. Great idea to export propane, but the record setting export pace diverted Midwestern supplies to export terminals down south and what was left was too few gallons for too many people. LP export policy had unintended consequences that put some folks in a real bind.
The biggest potential for unintended consequences here is probably unknown at this stage of the game. But American shale reserves have long sought a market, and a payday. It seems shortsighted to take this newfound resource potential and work so hard to lower the product's value. If American crude producers find their returns thinned by artificial international intrigue, there will be very little meat left on the bone and production will slow.
Let's go to crazy town here... Oil reserves drop because the 5 million barrel offering isn't enough to scare Putin, and the government mandates the sale of, let's say, another 30 million barrels. Producers are run out of business like so many farmers in the 1980's and gasoline hits $5.00/gallon, just like propane. All of this as Putin has no trouble finding friends in the global community. New leadership in Egypt is very friendly with Putin. Imagine a world with Putin in cahoots with the guardians of the Suez Canal.
Libyan oil production desperately needs Putin's kind of help ousting rebels from eastern oil terminals -- those rebels have cost Libyan crude oil production about 1 million barrels per day. My guess is that 20 Russian Special Forces soldiers could clear the pirates out of Libya in about ten minutes if so ordered.
And that leaves the Obama administration with an American public that cannot afford to use it's own oil or to produce it's own oil. Artificially driving down the price of American crude oil could potentially do more to harm American producers and the American public than it will do to dissuade Putin from reassembling his beloved Soviet Union.
Let's revisit the words of Ronald Reagan, who's thoughtful approach to this issue bodes a serious warning to those who would use our God-given resources in such a way. "You have to determine whether we're having as much effect on [Russia] or if that's being offset by a worse effect on our own [national economy]."
I hope this idea works, but Vladimir Putin does not appear to be at all ticklish, and Russia is not likely to back down this side of gunfire.