Oct 28/15 – What side of the government’s trade would you like to be on?

2015-10-28 9am EDT  |  #China #gold #Gordon Brown #oil #SPR

Governments do some pretty stupid things. As the years tick by, I become less and less surprised at their idiotic policies. But even I had to do a double take when I read about the recent addition to the proposed bill to increase the debt ceiling. From Bloomberg:

The U.S. plans to sell millions of barrels of crude oil from its Strategic Petroleum Reserve from 2018 until 2025 under a budget deal reached on Monday night by the White House and top lawmakers from both parties.

The proposed sale, included in a bill posted on the White House website, equates to more than 8 percent of the 695 million barrels of reserves, held in four sites along the Gulf of Mexico coast. Sales are due to start in 2018 at an annual rate of 5 million barrels, rising to 10 million by 2023 and totaling 58 million barrels by the end of the period. The proceeds will be “deposited into the general fund of the Treasury,” according to the bill.

Let me get this straight. The government is selling oil from the Strategic Petroleum Reserve to pay bills? Talk about burning the furniture to keep warm.

This stupidity of this decision baffles me. Last I checked, the SPR program is not a kitty to be raided when the government is running short on cash. According to the government’s website:


In managing the Strategic Petroleum Reserve Program, the Office of Fossil Energy’s overriding objective is to maintain the readiness of the oil stockpile for emergency use at the President’s direction.

Am I the only one who sees the word “Strategic” in this definition? Since when it is strategic to sell oil to make monthly payments?

The SPR is designed to provide an emergency reserve in times of war or other disruptions. To sell oil because you don’t want to increase the debt ceiling is incredibly short sighted, simple minded, and just plain foolish.

Not only that, but the government is in essence selling into an already over saturated market. Crude oil prices are bumping along six year lows. US energy firms are going out of business at a fierce rate. And now the government decides they want to pile on the supply? Governments are supposed to engage in counter cyclical policies. This US government seems oblivious to the fact that not only are they not helping, but they are consistently making things worse.

The other part of this decision that boggles the mind is the reality that geopolitical tensions are running hot. Whether it be Ukraine, Syria, Iraq or even China, it’s not as if everyone is getting along all sparkles and rainbows.

We all know about the ongoing disaster in the mid-east, but the US is even brushing up against new foes with the recent decision to send navy destroyers within 12 nautical miles of the disputed China Islands. This has provoked increased tensions from the Chinese. Here is a quote from an editorial in a leading Chinese newspaper:

In face of the US harassment, Beijing should deal with Washington tactfully and prepare for the worst. This can convince the White House that China, despite its unwillingness, is not frightened to fight a war with the US in the region, and is determined to safeguard its national interests and dignity.

Beijing ought to carry out anti-harassment operations. We should first track the US warships. If they, instead of passing by, stop for further actions, it is necessary for us to launch electronic interventions, and even send out warships, lock them by fire-control radar and fly over the US vessels.

Regardless of who you think is in the right, it sure seems like a foolish time to be reducing your Strategic Petroleum Reserve.

As a little bit of an oil bull, I actually take solace in this brain dead decision. The UK’s Gordon Brown created the infamous “Brown’s Bottom” in gold by selling $6.5 billion into the lows.

I expect this decision will prove just as ill timed.

My mantra is not to drone on about what should be, but instead deal with what is. There is no sense railing against the stupidity of the government, that’s like getting mad at the wind. Instead, let’s just accept it and decide how it will affect the markets.

I ask you, what side of the government’s trade would you like to be on? For me, all I can say to those bureaucrats is “bought from you.”

Thanks for reading,

Kevin Muir

the MacroTourist