Streetwise Professor

November 16, 2022

Biden’s Latest Energy Brainwave: Engrossing Diesel!

Filed under: Commodities,Derivatives,Economics,Energy,Politics — cpirrong @ 7:38 pm

The latest Biden energy brain wave is a possible requirement that fuel suppliers hold a minimum level of diesel inventory:

US President Joe Biden is considering forcing the nation’s fuel suppliers to keep a minimum level of inventory in tanks this winter as a means of preventing heating oil shortages and keeping prices affordable. It may actually do the opposite. 

Well actually actually, there’s no “may” about it. It will, if the administration indeed forces away.

As I’ve written previously, there are times when economic conditions make it optimal to hold low (and perhaps no) inventories. When the supply/demand balance is expected to improve in the future, holding inventories moves a commodity from when it is relatively scarce, to when it is relatively abundant. It is better to do the opposite. But since you cannot transport future production to meet present consumption, the best thing to do is to draw down inventories–perhaps to zero.

There is no reason to believe that the market has “failed” to respond efficiently to fundamental conditions. There is absolutely no reason to believe that Joe Biden or anyone who works for him has solved the Knowledge Problem and knows how to allocate scarce diesel over time better than the markets do. Do you really think Joe et al know that the supply/demand balance in diesel is actually going to get worse, when the market judgment is the opposite? If you do, seek help.

So yes, if carried out, this action would increase spot prices because the only way to increase inventories is to reduce current consumption, and the only way to increase current consumption is through higher spot prices. Further, this action would tend to depress deferred prices because it will increase future consumption.

So if he does this, it would be totally correct to put one of those “I did that” stickers on a diesel pump.

It’s ironic to note that mandatory government stockholding programs, sometimes seen in agricultural markets, are intended to increase prices (to help farmers, for instance). It’s also ironic that Biden is floating this after months of drawing down on government inventories of crude in the SPR–in order to reduce prices.

What Biden is proposing could be seen as a government run corner: the antitrust case of U.S. v. Patten (1913) identifies one of the salient features of a corner as “withholding [a commodity] from sale for a limited time” with the purpose of “artificially enhancing the price.” Biden is proposing “withholding” diesel from the market.

Or, using more archaic language, it is government run “engrossing” or “forestalling,” something that speculators are often (wrongly) accused of, as Adam Smith wrote about in The Wealth of Nations.

The only good news to report here is apparently market participants think this idea is so stupid that not even this administration will implement it. Diesel flat prices and calendar spreads haven’t moved much after Biden’s announcement.

But it would be much better if the administration actually had some good ideas rather than a stream of bad ones, some of which are so obviously bad that they will never come to fruition.

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  1. I don’t have a screen in front of me, so I’m totally willing to believe it when you say that calendar spreads on,(uhm, heating oil?) haven’t changed much.

    But have options on HO calendar spreads had a bit of a bump up in implied volatility? How about options on heating oil cracks?

    Comment by Tony Corso — November 16, 2022 @ 7:57 pm

  2. Flagging typo
    “and the only way to increase current consumption is through higher spot prices”

    Comment by isp001 — November 17, 2022 @ 2:06 am

  3. Someone should write “Economics an intelligent schoolboy knows” and send copies to politicians. We’ve already seen a couple of items of suitable material this week.

    There’s no need to use the highly intelligent schoolboy as the base case: calculus may be omitted. Use simple words and simple diagrams for simple people.

    Comment by dearieme — November 17, 2022 @ 5:27 am

  4. Biden has a brainwave? Only if you show me proof of the frequency and amplitude will I believe it.

    Comment by philip — November 17, 2022 @ 2:29 pm

  5. We all ought to stop pretending any of this is Biden’s idea(s). It is certain that he has barely enough brain power to pick his own ice cream flavor or try to feel up one of the party faithful on the day he voted.
    These ideas are emanating or bubbling up like gas bubbles from those who are really running the country but have been elected by nobody, responsible to no one and think it’s really cool to be more like Europe. I understand saying “Biden’s idea” is a shorthand for “the administration”, but we oughta stop pretending this is anything more than the “French Directorate” writ large.

    Comment by Donald Wolfe — November 19, 2022 @ 8:21 am

  6. @ philip: come on, that’s not fair. Medical science is astonishing these days. They can tell Biden is alive.

    Comment by Green as Grass — November 21, 2022 @ 3:38 am

  7. @GaG
    Show me the encephalograph then. Flatlining I bet.

    Comment by philip — November 21, 2022 @ 3:25 pm

  8. Now, chaps, I’ve just had a brilliant idea. Dieselcoin. Guaranteed liquid investment. Always solvent. Can’t go wrong. Do you sincerely want to be rich?

    Comment by dearieme — November 21, 2022 @ 3:58 pm

  9. The Dropkick Murphys are playing Wembley in January. The prof likes them, I can’t think why.

    @dearieme – that is actually a genius idea. A finite number of dieselcoins, redeemable for diesel, meaning it will rocket in value as ecofascists abolish the energy industry. Would also work for gas. Actually, for all energy, which ecofascists think should be banned.

    Comment by Green as Grass — November 22, 2022 @ 5:09 am

  10. Thanks GaG
    I like the Dropkick Murphys too. Think I’ll check it out.
    I think suppositories are a better store of value than crypto Dieselcoin though. At least you can shove them up your arse.

    Comment by philip — November 22, 2022 @ 3:54 pm

  11. @Green as Grass. De gustibus non est disputandum.

    Comment by cpirrong — November 25, 2022 @ 12:03 pm

  12. @Green as Grass–How can you not like this?!?!?

    I suspect some English anti-Irish sentiment, though the “Green” in your handle does raise some doubts 😉

    Comment by cpirrong — November 25, 2022 @ 12:24 pm

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