Oil prices lost about half their value between June and February, and now there’s a debate over whether there’s a second price drop in our future because of a persistent US oil glut. Alan Greenspan, the former chairman of the Federal Reserve Board, says there is.
Here’s how the debate shapes up: On the one hand, the US Energy Information Agency (EIA) reports that oil supplies in the United States reached 434 million barrels in late February, the most in more than 80 years, and that storage is beginning to reach capacity, though there’s even more debate on that issue.
The other side says that the main oil storage hub in Cushing, Okla., with a current capacity of nearly 71 million barrels, is plenty big enough, and that it’s in the process of being enlarged. Besides, US refineries undergo semi-annual maintenance every spring and autumn, so stocks will be depleted, then decline even further as the summer driving season arrives.
And the EIA forecasts that energy companies’ recent spending cuts, caused by the drop in oil prices, will lead to a drop in crude production by 170,000 barrels per day in the third quarter of 2015.
Whichever side is right, Greenspan is siding with those who see a second slump in oil prices. In an interview with Bloomberg Television on March 13, he agreed that the Cushing facility will reach capacity “by next month.”
“Until we find a way to get out of this dilemma,” Greenspan said, “prices will continue to ease because there’s no place for that oil to go except into the markets.” In other words, a continued glut.
Even reducing the number of US rigs hasn’t made much of a difference, Greenspan said. “The rigs that have been closing down have not been affecting the capacity to produce crude,” he said. “You are getting the inefficient rigs shutting down, but the capacity to basically build oil expansion remains there.”
Greenspan says the problem is the law barring the export of US oil to virtually all other countries. “[W]e can’t legally export the way we would for most products,” he said. “We can do a little exporting [to] Canada, but essentially, we’re bottling up a huge amount of crude oil in the United States.
Congress banned the export of most U.S. crude oil, except under special circumstances and with specific licensing, in response to the economically crippling Arab oil embargo on shipments of oil to Western countries that supported Israel during the Yom Kippur War of 1973.
Since then, only refined petroleum products such as gasoline and diesel could be exported. Exports of all crude or refined oil to Canada continued without interruption if an exporter had a special permit. And now a bipartisan group of 21 senators have written to Commerce Secretary Penny Pritzker on Feb. 18 urging the Obama administration to allow a resumption of oil exports to Mexico.
In a statement, one senator, Republican Lisa Murkowski of Alaska, said, “It’s time to harmonize North America’s trade” by including Mexico as well as Canada as recipients of US oil exports.
By. Andy Tully of Oilprice.com