About 30 years ago, election fever was running high in
both Canada and the United States amid worries that North America, if not the
world, were sliding into a recession.
I wrote to Canada's finance minister, suggesting an
idea to help alleviate some of the hardship that a segment of the Canadian
economy, I was familiar with, was going through. It was the mining industry;
especially gold mining. Today, I see a suggestion somewhat similar to mine,
proposed in a setting that is so different, it appears that what was workable
then, will not be today.
Today's idea was proposed by Robert Zubrin who wrote
an article under the title: “Save the US Oil Industry,” and the subtitle:
“Saudi market gaming is harming US firms––but there's a way to stop it and
profit.” The article was published on March 13, 2020 in the online publication
The Bulwark.
Zubrin is saying that as long as Saudi Arabia is
selling oil as cheaply as 30 dollars a barrel, America should use taxpayer
money to buy the oil and store it. When Saudi Arabia gets tired playing the
silly game, and stops selling its oil cheaply, the price will rebound, perhaps
to 60 dollars, and that's when America should sell what it has hoarded, thus make
a hefty profit for the taxpayers.
That will not work as envisaged for the reasons that
will be explained in a moment. But first, here is what I had suggested 30 years
ago or thereabout.
A good part of the mining industry in Canada is based
on the extraction of gold. Most of the mines are situated in the remote areas
of this sparsely populated, vast country that is Canada. For this reason, small
towns rise around the mines when they are discovered, and do well as long as
the mines are operating. But when the economy shifts and the mines decline, so
do the towns around them. Hardship hits the people hard, something I witnessed,
having worked in a small town for a couple of years.
This was beginning to happen in Canada when I wrote to
the minister of finance suggesting that the Canadian government, in concert
with the central bank (and perhaps the commercial banks,) should buy gold and
use it as reserve. I stressed that printing money to buy gold will not devalue
the currency because any tendency for the money to depreciate, will be offset
by the tendency for it to appreciate on account that the banks will increase
the value of their reserves with physical gold.
Surprisingly, someone in America got impressed by the
fact that my suggestion helped steer the debates from the stale sociopolitical
topics where they were mired, to the sexier economic topics. Excited by the
change I had caused, someone came up with the now famous quip: “It's the
economy, stupid!” In any case, I did not follow up on the idea to see whether
or not it was implemented.
But my idea being an “inspiring” one, why is it that
Robert Zubrin's idea may not be just as good? Well, the weakness in Zubrin's
suggestion stems from his disregard of two factors. One factor has to do with the
lack of available space to store the oil. The other has to do with Zubrin
ignoring how the other oil producers and oil buyers will react to America's
move. Take a look at Zubrin's suggestion in his words:
“So long as the Saudis dump their oil at $30 per
barrel, the US government should buy all they produce and add it to the
Strategic Petroleum Reserve. This will send prices back up. As soon as oil hits
$60 per barrel, the United States can start selling from the reserve. Americans
will net a profit of $30 per barrel––which comes to about $9 billion per
month”.
Well then, here is the problem with that suggestion:
The maximum capacity of the Strategic Petroleum Reserve is a little over 700
million barrels. Since it was built, it has never contained less than 600
million barrels. This means that right now, it may have a spare capacity to
take in only an additional 100 million barrels. That's 10 days-worth of Saudi
production whereas Zubrin is counting on 300 million barrels each and every
month for as long as 3 months or more. For the sake of the discussion, assume
for a moment that this problem can be solved by some magic.
Next, suppose that the moment the Americans show up to
buy Saudi Arabia's oil, the Saudis disregard their own strategy to maintain
market share by maximizing the number of clients they cultivate, and sell all
their oil to the US. What do you think the other clients will do? Will they bid
$60 a barrel for oil they know has cost the Americans only $30 a barrel? And
what do you think the other producers of oil will do? Will they not ramp up
their production to the maximum that they can, thus diminish the bite of
America's scheme?
Once again, assume for a moment that this problem too
can be solved. After 3 months, Saudi Arabia throws in the towel and starts
selling its oil at $60 a barrel. America finds itself sitting on 900 million
barrels of Saudi oil that cost it $27 billion to buy. Will it try to sell it?
At what price will it sell it?
Do you realize that normally, a mere 100 thousand extra
barrels of oil per day on the market, drops the price by several dollars? Can
you not imagine that the moment the US says it is selling 900 million barrels,
the price will drop to $5 a barrel or less?
Finally, lest we forget that America would have concocted
this scheme for the sole purpose of helping its shale oil companies, what do
you think these companies will be doing during the 3 months that the
Saudi-American shenanigan will last? And what do you think will happen to them
when the price of oil will drop to $5 per barrel or less?