FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
April 5, 2022

IN THIS ISSUE:

1. Biden To Draw Down Strategic Petroleum Reserve

2. Consumer Spending Falls In February Amid Rising Prices

3. Core Inflation Rose Fastest In 28 Years In March, Up 6.4%

4. Biden Wants Huge Drawdown in Strategic Petroleum Reserve

5. Interesting Facts About The Strategic Petroleum Reserve

Overview: Biden To Draw Down Strategic Petroleum Reserve

President Biden announced last week that he intends to reduce the US Strategic Petroleum Reserve by the largest amount by far in US history just ahead. He says his plan will reduce gasoline prices significantly. But history shows otherwise, and the Biden administration knows it. So, the question is, why are they doing this?

There is a lot of speculation on this question. I have some thoughts on the reason why they are going to do this that you are not likely to see elsewhere. I’ll share those thoughts with you as we go along today.

Before I get to those comments, let’s look at two of the latest key economic reports. Consumer spending, which accounts for two-thirds of Gross Domestic Product, fell sharply in February. In addition, core inflation rose by the fastest pace in 28 years last month. Inflation is out of control.

Both reports were worse than expected, so these topics should make for a lively discussion. Let’s jump right in.

Consumer Spending Falls In February Amid Rising Prices

US consumer spending declined in February, suggesting that rapidly rising prices for goods and services are starting to temper demand. Purchases of goods and services, adjusted for changes in prices, fell 0.4% in February, following a 2.1% jump in January, according to Commerce Department figures last week.

The median forecasts in a Bloomberg pre-report survey of economists called for a 0.2% decrease in inflation-adjusted spending from the prior month. Bottom line: Consumer spending dropped more than expected in February.

The government’s latest spending data suggest American consumers are feeling the pinch of the fastest inflation in decades. Fortunately, continued strength in the labor market – along with excess savings – has provided many households the wherewithal to keep spending, although down from previous levels.

The personal saving rate – or personal saving as a share of disposable income – ticked up to 6.3% in February , though it remains near an eight-year low. When adjusted for inflation, disposable personal income declined for a seventh straight month.

Core Inflation Rose Fastest In 28 Years In March, Up 6.4%

The Personal Consumption Expenditures (PCE) price index, which is the Federal Reserve’s preferred inflation target, increased 0.6% from a month earlier in March and 6.4% from February 2021, the largest annual increase since 1982.

The core PCE price index, which excludes food and energy and is often seen as a more reliable guide to underlying inflation, rose 0.4% from the prior month and was up 5.4% from a year ago.

The latest report largely reflects an inflationary environment – before the onset of Russia’s war in Ukraine, which has pushed up prices even more. Rapid inflation across the US economy has left households with less cash to spend on discretionary items and services like entertainment and dining out. And though wages and salaries rose the most in four months, inflation more than eroded the pay increase. 

The acceleration in inflation last month only adds to concerns about the breadth and persistence of price pressures, corroborating calls for more aggressive Fed rate increases. A solid March jobs report last Friday, on the heels of the latest price data, may cement expectations for a half percentage point rate hike at the Fed’s next policy meeting on May 3-4. The financial markets are already reflecting such a half-point increase.

The Bureau of Labor Statistics' Consumer Price Index (CPI) rose 7.9% in February compared to last year, marking the fastest annual jump in 40 years (1982). This took out January's previous 40-year high rate of 7.5%.

The forces driving inflation higher this year show no signs of reversing anytime soon. The question is whether we’ve seen the worst of it. Time will tell. Fortunately, the stock markets are weathering the higher prices pretty well so far.

Biden Wants Massive Drawdown in Strategic Petroleum Reserve

President Biden announced last Thursday that he plans to release roughly one million barrels of crude oil per day from the US Strategic Petroleum Reserve (SPR) for the next six months. It will be by far the largest reduction in the SPR in the nation’s history. There’s never been anything remotely like it in the SPR’s nearly 50-year history.

President Biden says he’s doing it in an effort to reduce gasoline prices which have soared to new record highs this year. Few believe it will be successful. Actually, this is nothing new, other than the size and scope of the oil releases the president has planned. Democrat presidents routinely call for tapping the SPR when gasoline prices get unacceptably high, even though they know it doesn’t lower oil prices much if at all.

So, why do they do it then? The likely answer may surprise you. I’ll get to it as we go along today. There are a lot of interesting facts surrounding the US Strategic Petroleum Reserve and related energy policy. Let’s take a look at some of them.

Interesting Facts About The Strategic Petroleum Reserve

While most Americans have heard of the Strategic Petroleum Reserve, most I suspect don’t know a whole lot about it. I think you’ll find what follows as interesting as I did.

The US Strategic Petroleum Reserve (SPR) was created by President Gerald Ford in 1975 in the aftermath of the Arab oil embargo, which sent crude oil prices to $140 per barrel for the first time ever.

The reserve is the country’s emergency supply of oil. It’s housed underground in dozens of caverns among four giant salt domes along the coasts of Texas and Louisiana. It is the largest known emergency energy supply in the world.

The reserve can hold more than 700 million barrels of oil to be used “to counter a disruption in commercial oil supplies which could threaten the U.S. economy,” according to the Energy Department. The oil can be used for domestic purposes or sold to other countries and used to pump more supply into the market.

We currently have between 565 and 600 million barrels of oil in the SPR; the level fluctuates based on Energy Department sales from the reserve. For discussion purposes here, let’s call it 580 million barrels.

President Biden wants to sell 1 million barrels per day for the next six months, although it will take some time to ramp up to that level. That would be 180 million barrels over the six months. This means our supply of oil would drop from 580 million barrels to only 400 million barrels. Again, this would be unprecedented by a long, long shot.

The question is, of course, whether dropping our oil reserves from 580 million barrels to 400 million represents a threat to national security. The answer for us as ordinary Americans is impossible to know. About all we can reasonably assume is we’re less secure at 400 million barrels in reserve than at 580 million.

Obviously, President Biden and his advisors believe national security will be fine even if we sell off roughly one-third of our oil reserves. These can always be replaced, after all. Yet the real question is, of course, why sell them in the first place? Especially if you know it will not result in a lasting decrease in gasoline prices.

Here's another point the politicians don’t like to talk about. It’s true we can easily replace the 180 million barrels President Biden wants to sell. But at what price? The 580 million barrels in the SPR today was purchased over many years, decades even.

While it is impossible for us to know the average price per barrel of the oil in the SPR today, I think it’s safe to assume it is considerably less than today’s crude price just above $100 per barrel. As you can see in the graphic below, most of the oil in the SPR was bought back in the 1980s when prices were a fraction of what they are today.

So, it will cost us a lot more to replace the 180 million barrels Mr. Biden is hellbent on selling. So, again, the question is why do it in the first place? I think I have the answer:

They just want to be seen as doing something, anything to look like they’re helping consumers by lowering gasoline prices. It doesn’t really matter if it works; it’s all about the optics – politics, you know. Yes, I think it could be just that simple, sadly.

Keep this in mind as you watch the president gear up to sell 180 million barrels of oil from our Strategic Petroleum Reserve just ahead. He thinks we’re too dumb to know it won’t work. This despite the fact that I saw surveys last week showing most Americans are not in favor of selling oil from the SPR.

Bottom line: President Biden and his cronies don’t care what we think. Sad but true.

Very best regards,

Gary D. Halbert

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