Federal Government Bailing Out Oil Companies?

oil pump sunset

On Reuters, we read:

The U.S. government on Friday proposed buying buy up to 5 million barrels of sweet crude for the Strategic Petroleum Reserve to replace oil it sold in a test sale last year.

In March 2014, the Department of Energy astonished oil markets with a test sale of 5 million barrels, which some observers saw as a subtle message to Russia after its aggression in Ukraine.

Friday’s plan to buy back the oil was another surprise for markets as a drop in U.S. crude imports in recent years has led to calls to reduce the size of the emergency reserve. But the government is required by law to replace the oil withdrawn from the SPR within one year.

With U.S. oil prices at less than half of what they were last year, the DOE has been able to use funds from last year’s sale to bolster its defenses against unexpected fuel shortages.

Late last year the DOE used some of the funds from the sale to establish the first-ever U.S. gasoline reserve in the Northeast “in order to address some of the resiliency needs in the region made evident by Superstorm Sandy in 2012,” a DOE spokeswoman said.

With the remaining funds, the department is buying back the crude oil.

An energy consultant said the plan signaled the government could expect higher prices soon. “When the government starts buying crude oil, it’s signaling that they’re picking a bottom for the market,” said Carl Larry, director of business development at Frost & Sullivan. “This has to be more of a financial play.”

This situation illustrates Thomé’s Rule of Government #14: “There is almost always an ulterior motive.

Prices dipped over the past few months due to an uptick in production and supply. Prices per barrel of oil are at a record low: $44.46 apiece. This is down from a record 3-year high of nearly $110 in 2013.

The oil market won’t sustain oil prices below $50 for very long. Tens of thousands of American oil workers have already been laid off. Hundreds of rigs have been forced to stop production.

The Oil Boom, as we hear it described, is really the Oil Bubble. I have explained it here. The oil industry is experiencing a natural and rational market response to lowering prices in a bubble market: veritable collapse. While prices stay low, the oil companies and associated acts will continue to suffer.

Not so fast. Recall what the analyst in the article said: “When the government starts buying crude oil, it’s signaling that they’re picking a bottom for the market… this has to be more of a financial play.

The US Government is going to buy 5 million barrels of oil. This is a lot of oil. The government is set to become a major buyer of oil. This will gobble up supply. Supply will begin to fall, while demand will remain high. When supply falls in relation to demand, what happens? Prices rise.

The government is set to buy oil under the guise of replenishing the Strategic Reserve. It is important to them that voters believe this; Heaven forbid that voters discover what the government purchase of 5 million barrels of oil is really about: bailing out the oil industry.

Washington has had enough. The US Government is controlled by Keynesian bureaucrats who need to keep their supposed “Economic Recovery” charade going. They need to keep the Federal Reserve-created bubbles going. The only way they can do this is by keeping prices high.

Gasp! Government control of supply? Federal dictation of prices? Don’t be silly. Washington never does this sort of thing… right?

“There is almost always an ulterior motive.”

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