Oil Glut Watch #1

Welcome to strange scenes from the oil glut. A side show in the global recession is this surreal result of low oil demand: A floating pool of at least a hundred oil tankers wandering the seas, according to this Reuters story.

The vision of 125 million barrels of homeless oil is amazing enough. One analyst even calls it "ethereal." But consider how different this is from a year ago, when the Nigerian militia named MEND attacked Shell pipelines that shut in just 170,000 barrels a day on May 3, and the price of oil went over $120 a barrel soon after. Then, the fear was that the market wouldn't be able to find an extra 170,000 to make up the difference, what with the Chinese Olympics and the US summer "driving season" about to hit. Even then, 170K barrels wasn't really all that much--the world was trading nearly 85 million a day, but oil prices were being determined by fears about the oil on the margins.

Now we have the exact reverse: a giant slosh of oil that appears to be supporting prices around $50, but is also keeping them from budging too far upward. It's a sort of ad hoc anti-OPEC too--hampering the cartel's ability to raise prices by cutting production.

Given that oil prices are likely to rise as the economy recovers, we might spend this time thinking about how to mitigate their impact or at least hold them from rising too fast. We could be proactive about reducing US oil demand by getting people into more efficient transportation, but fast. We could use the downturn to add storage tanks to our refineries, since inventory levels are in a feedback loop with prices. And maybe there's something to be done with a floatilla of oil tankers, like a more mobile, global, SPR, but aimed at dampening price rises.