The Lesson that Created the Strategic Petroleum Reserves

In this episode, Tim and Taber dive into the complexities of the oil and gas industry, exploring how efficiency, market dynamics, and industry mergers shape the current landscape. They also share behind-the-scenes insights into podcasting challenges and industry trends. In this episode, we explore the history, geopolitics, and economics of oil, including the 1973 oil crisis, the strategic petroleum reserve, and current market dynamics influenced by geopolitical tensions.


Key Topics

Oil and gas industry efficiency and rig count
Impact of industry mergers on market share
How geopolitical events influence energy markets
Podcast production challenges and solutions
Historical shifts in energy policy since 1973 1973 oil crisis and its impact on US energy policy
Creation and purpose of the Strategic Petroleum Reserve
Geopolitical influences on oil prices, including Iran and Taiwan
Market psychology and trader behavior in oil markets
Choke points like Strait of Hormuz and Panama Canal


Sound Bites

"The war that never started or ended."
"What happens when oil becomes a political weapon?"
"Efficiency is the industry’s new reward."


Chapters

00:00 Introduction and Technical Issues
05:11 Market Update and Current Events
11:15 Challenges in the Oil Industry
17:08 Service Companies and Market Dynamics
23:08 Future Trends in Directional Drilling
29:24 The Evolution of Directional Drilling Services
37:18 The Impact of the 1973 Oil Crisis
42:46 Imagining a World Without Oil
51:56 The Strategic Petroleum Reserve and National Security
59:19 Government Regulations and Fuel Efficiency
01:04:54 Choke Points and Their Impact on Oil Supply
01:11:20 The Boring Economics of Oil and Gas
01:17:50 The Strategic Petroleum Reserve: Purpose and Current Status

Resources

Riverside.fm - https://riverside.fm
Final Cut Pro - https://www.apple.com/final-cut-pro/
Teleprompter Automatic App - https://apps.apple.com/us/app/teleprompter-automatic/id123456789
Oil Market Overview - U.S. Energy Information Administration - https://www.eia.gov/energyexplained/oil-and-petroleum-products/
The Prize: The Epic Quest for Oil, Money, and Power by Daniel Yergin - https://www.amazon.com/Prize-Epic-Quest-Petroleum-Power/dp/0140268873
OPEC Official Website - https://www.opec.org/
Crude Logic Show - Website - https://www.crudelogic.show/


 

Transcript

SPEAKER_02 0:00

There was a time when people weren't asking what gas cost. They were wondering where they could find any. 1973 was the year the world learned oil isn't just energy, it's geopolitical power. Today we're talking about the event that changed energy policy forever.

unknown 0:15

This is crude logic.

SPEAKER_00 0:18

Welcome to the show.

SPEAKER_02 0:20

Welcome everybody to this episode of Crude Logic. Let's go ahead and give the crowd what they want and give them a market update.

SPEAKER_01 0:26

In today's market minute, tensions rise again in this tradeover moves and oil is up. Uh West Texas is at 7454, Brent is at 78.98, and natural gas is at 322. Currently sitting at a slight rig increase as we go from 573 to 580.

SPEAKER_02 0:44

Today's industry rewards efficiency more than simply adding rigs. Do you think that the rig count isn't exploding because of what we've talked about in the past? Because efficiencies are getting better, or is this tied into the Strait of Hormuz and Iran and the on again, off again war that we're having? I mean, obviously that impacts everything, but is that really impacting the rig count?

SPEAKER_01 1:09

We're getting much better at what we do, much quicker at what we do. We don't need as many rigs to do it. And the second thing is, is is all of the capital constraints, capital constraints, they throw that around all the time in the industry. But the bigger companies like Exxon and Conico and Chevron and all these guys, they they set their budgets at the beginning of the year. So if they set that budget at $67 a barrel, they say we're going to drill with this many rigs, and that's all we're going to do. And if prices go up, instead of picking up rigs, they go and they complete, they're drilled in uncompleted wells. They go and frack wells that they haven't fracked yet and they bring those online. They don't put any money into bringing a rig online because they don't know if the price is going to hold or not. And then for the smaller companies, they don't have any land to drill. They don't have any lease holds. They're trying to go out and get landowners to give them a lease. And then if they actually are able to land the lease, it takes like six months to get a rig now. Even though there's dozens of rigs sitting in the yard, you can't get one out of the yard and bring it out to a location because it's got to be like sandblasted and repainted and pumps worked on and new, you know, packing and the mud pumps and all this other stuff. There's all kinds of stuff that has to happen to get the rig ready. And it's taking them like six months to do it because they're pulling people, they're pulling from a everybody in our industry is tired of the ups and downs. So a lot of guys, when they get let go or when something slows down, they leave and they go find something in a different industry, and they're trying to pull these rigs out of the yard with brand new rig hands that have never worked on a rig, don't have any idea what they're doing. So that's my take.

SPEAKER_02 2:38

So is that by requirement, by law, or is that policy for by these companies?

SPEAKER_01 2:45

The companies are like they're you know, we're drilling deeper wells and and going farther and uh higher end tools, they have to have more consistent flow rates, they have to have better, um better pumps so they're not messing with the PD signal, the all kinds of stuff. But they as we have progressed and gotten better at things, they have figured out exactly what about the rig itself is messing up the drilling process and then made it mandatory in the contract for the the rig owners to bring those rigs up to you know this standard.

SPEAKER_02 3:16

And that's is that driven by the operator or is it driven entirely by the operator? Okay. Which I figured that was the case. But basically, what you're saying is that the rig count isn't increasing because the industry is stepping on its own toes yet again. Shocker. If we can do more production with less equipment on the ground, then that does save the operator money. Now it does nothing for these small service companies because fewer rigs, less business, more competitive to win the work than it already is. And is it causing more service companies to fail or disappear?

SPEAKER_01 3:55

It's causing more of them to disappear. I mean, I could I can tell you from what I'm seeing on a daily basis that the what the result is, is the smaller companies they build themselves up and they get to be pretty good service company, establishing a reputation. Then prices go down, and the big dogs like Halliburton, Slumberjay Baker, they go in and they buy these companies and they, you know, they acquire them, pull them in, and make the owner sign a non-compete for a five-year period. But he made $35 million off of the deal. So he's like, I don't, you know, I don't care, I won't compete for five years. And two weeks later, that guy who owned the company may have signed an NDA, but his son opens up a business in his garage, and now they've got another directional company, and the relationships are still there that the previous owner had. So I think they've gotten kind of wise to that game. Plus, you know, in that particular in directional, particularly, there's no like real differentiators unless you're the halibert and the slumber J the Baker because you've got a high-end rotary steerable tool or a bunch of you know triple combo formation measurement tools, things like that. Cathedral bot altitude or merged with altitude a while back, and then they have slowly been buying up every directional company across the United States. Now they run out of Canada and they own almost all of the smaller directional companies except for I say smaller, but like um one of the bigger companies, I guess, is uh total the biggest company is total. One of the bigger companies is Pro. Um then there's um Phoenix and Altitude are kind of like the four biggest players right now, and Altitude's buying up all of the smaller entities, they're taking in all of their motor fleet, so the game has kind of changed from market share of the rigs to market share of the assets, and they're you know, now they have the biggest motor fleet because they've pulled in all of this stuff. I don't know what they're planning to do, if they're planning to become like a more of a rental company and rent to the the totals and the pros and the phoenixes of the world, or if they're trying to aggregate all of the assets and then raise the prices and say, you know, if you want to start a directional company now, you've got to go buy motors. Good luck getting those made.

SPEAKER_02 6:05

And then you have the whole contingent labor piece or in-house drilling programs, the original way that these directional and companies and MWD companies provided packages. They had their own shops. They basically it was a one-stop shop, right? They ran the people, they ran the tools, they did the logistics, they did all that, and they they gave the operator one package price. And but now we're seeing more. Oh, well, we'll just take these MWDs, uh, put them in a remote operations center, we'll hire the DDs direct, and everybody will just rent the tools from whoever's got the motors at the time, which really helps the operators change operations on the fly much easier. It's just different now. Now you got contingent labor workforces that are basically these operators are saying, okay, we'll just go through this company, we'll make sure that we have the DDs that we want on location every time, all the time, and we'll rent the tools from somewhere. So it it really makes the operators more nimble. The whole landscape is just different. Imagine waking up tomorrow, your local gas station has no fuel. The next station doesn't either. People start lining up, arguments break out, gas stations limit purchases. In 1973, OPEC started cutting exports to countries that were supporting Israel. Because of this policy that they adopted, it really kind of started leveraging oil as a geopolitical tool instead of simply a commodity.

SPEAKER_01 7:43

Almost all the oil came from Saudi Arabia and the Middle East, right? The from the OPEC nations.

SPEAKER_02 7:47

Yeah, and the strategic reserve was a result. This was the first real situation where the the OPEC oil producing nations basically used this as a tool to hurt any countries that were supporting Israel. And because it wasn't like today, where we were the either the largest or the, you know, I keep hearing we're the largest, but we still keep letting OPEC control things. So I don't, and you know, our gas prices fluctuate with the market. Well, if we're the biggest producer, um, I can remember being in Saudi Arabia during Desert Storm, and the oil prices were ridiculously low. I don't remember exactly what they were, but I do remember the feeling of wow, these gas prices are way lower than back home. And that makes sense. They're they're an OPEC producing nation, they're oil heavy, they've got a lot of the resources. They all drive V12s. Yeah, yeah. I mean, Lamborghinis were just like Toyotas over there because they produce so much and all that, their gas prices were way lower. Now, I know things have changed, but if we have become the number one exporter, then the market shouldn't really impact us that much.

SPEAKER_01 9:15

Our issue is that we have all the refineries that can bring their oil up to production ready, and they have all the refineries that can bring our oil up to or I say production ready, like marketable. We don't have the ability in our country to clean our own oil with our own refineries. I think the Trump administration is trying to, but it's just uh besides all the regular political drama that comes with anything that any president tries to do, there's also the like argument constantly with should we be putting more money into refineries when nuclear power is a real thing, we should try to move to that, or you know, data centers coming online. There's a bunch of stuff that goes into that. But I think that there's definitely some talks. I know there's definitely talks about doing more refineries that could clean our oil. It just takes them like 20 years to build one. It's ridiculous.

SPEAKER_02 10:01

Yeah, which I don't understand that either. I mean, obviously there's a lot that goes into building a refinery, but I think a lot of regulations and a lot of other things control markets and things like that, control how quickly these refineries can come online. Back to 1973 and this crisis that we faced here in this country at the time. Here's what Americans saw when this happened. The gas stations started running dry. There were long lines for gas. They had days where it was odd, license plates could fuel up, even license plates would fuel up, which caused a lot of people to steal other people's license plates. Hey, Bill, can I borrow that license plate today? I'll bring it right back, I swear. Yeah, I mean it. I'll bring it back by tomorrow. Because people were, you know, starting to try to hoard it, then they started rationing fuel. People were changing their daily routines based on the gasoline availability. It was basically the worst environment imaginable, right? Like nobody had anything, the gas lines were crazy. So this was really disruptive. And part of the reason why it was so disruptive is because there was such an independence. We were heavily independent on imported oil at the time. So this is another reason why we have to be energy independent. But then it goes back to if that was caused because there was a high dependence on imported oil, and now we're the number one exporter, shouldn't the impact on us be less? I keep going back to that, but it, you know, it's the whole rises like a rocket, drops like a feather thing. I, you know, it doesn't make any sense to me. Yeah, I think that we negotiated ourselves into a corner with I mean, we probably are paying I don't know.

SPEAKER_01 11:51

I don't know what the agreements were, right? OPEC or uh the petrodollar and all that stuff happened in 1974, I think. Whatever we negotiated probably gave them a far better hand because that's just what we do when we negotiate with other parts of the world is we get screwed somehow on the you know, taxpayers pay the pay for their we're probably paying for their Lamborghinis, is what I'm saying.

SPEAKER_02 12:17

Without a doubt. I mean that's that's been proven. The the American citizen taxpayer is paying for the world. That that's just a fact. Uh maybe not these big OPEC producing countries, they got a lot of money and all that, but I still I'm pretty sure we're sending them a lot of money. Yeah. So and that hasn't stopped. Part of the reason why it happens because we didn't have any emergency storage. So transportation and everything, even today, you know, for the electric cars, and you can say what you want, but we we we've talked about it a lot that oil and gas it may not run the vehicle, but it basically made the vehicle. So really everything depends on petroleum. So what were the lasting changes from the Yom Kipper War? And I don't care if you ask if I said that wrong, I'm just a redneck. We created the strategic petroleum reserve. So this had not been done previous to that, which doesn't make a lot of sense on the heels of, I don't know, World War I, World War II, Korea, you know, Vietnam. You know, it seems like somebody would have thought, hey, we need to save some of this stuff if we're gonna, I don't know, be in all these wars. This was when uh energy security became a national security issue. This whole situation really just kind of changed how we as a nation, as a government, looked at petroleum supply. You know, I it's it kind of seems like they were just thinking, oh, well, we need gas to fuel our cars. It was good that this happened because it shifted the mindset to oil and gas being a national security thing. If you can't run your country, you can't defend your country. And it seems like they would have been thinking about that long before 1973, but you know, government politicians, right? They were probably more concerned about lining their pockets with the Vietnam War and I'm sure that they made out pretty good themselves in whatever negotiation happened. Yeah, exactly. Politicians, not the Americans. The government started planning decades ahead instead of months ahead. The real lesson wasn't running out of oil. It was realizing how dependent modern life had become on it. Oil prices aren't determined only by supply and demand. They're also driven by expectations. There are four things that traders price immediately political instability, military conflict, shipping risk, and market psychology. Ironically, all of these things are involved right now with the Iran war, if if that's what we call it now. With the Strait of Hormuz and Iran, and I know that we keep bringing it up constantly, but it's a huge deal for this industry. I mean, it it's it's impacting a lot of things. And the market fluctuates so much because of this. And and really, I can understand the market fluctuating like this because we were just dropping down below $70. Things were looking good, but you know, we don't want to drop too low. You know, we all know there's that sweet spot. Um but if these are the four things that traders price on immediately, political instability. Well, we clearly have that, not only with the war in Iran, but we have instability within our own country, all over the world. I mean, it's it's a like next level right now. Military conflict, you know, shipping risk. Well, obviously the Strait of Hormuz being dangerous to pass through or being impassable, that clearly develops a shipping risk. Which all of this ultimately affects market psychology. So this is why we're going to, I think, see fluctuation in price per barrel up and down for a while. I I don't think it's going to level out for some time. May maybe it won't level out for a really long time. I don't know. But it's pretty volatile.

SPEAKER_01 16:27

Yeah, I think that it's going to stay around 75 up just like you're saying, up and down, go drop down to 65 up to 85, but it's going to be around 75 for at least a couple of years, I think. And then uh, I mean, this is you don't think it's gonna go up to $100 again? I was gonna say this is total speculation, but then after that, I think it's gonna be higher than 100, and I don't think it'll come back down maybe ever.

unknown 16:52

Yeah.

SPEAKER_01 16:53

I just think in general, like the population's getting bigger, there's it's getting harder to get to it. Just the economics of it alone, it's gonna have to go up in price to make it worth it for oil and gas companies to drill for it.

SPEAKER_02 17:06

Yeah, and and we have to now uh address all these choke points, Strait of Hormuz being one of them. Other examples are the Suez Canal, the Panama Canal, major export pipelines, you know, all these things that were before just, you know, geographical or geological, you know, formations or whatever that were, you know, just existed, Panama Canal being different, that was man-made. Um, but it's still a choke point. If somebody was to seize control of the Panama Canal, whether that be China, us, whoever, if somebody was to seize control of that and it and it got and it became more of a choke point, now people are going to have to change the shipping routes and all that. It's a little bit different than uh the Strait of Hormuz because you don't have an option with the Strait of Hormuz. You have to get the oil out of there, and ships have to get in there to get it, and it's a one-way in, one way out thing. For now. Panama Canal, for now, yeah, you're right. They're they're probably going to create new canals. And I know we've talked about either they're working on it or his plans on doing it in the area of the Strait of Hormuz on the other side. But still, even if they create a canal that's still a choke point, even if it solves our problem today with the Strait of Hormuz, it could be another problem down the road. So, you know, some of these solutions become problems down the road because of different things, different people in power, different geopolitical situations, things like that. So there has to be an effort made to either negotiate with other countries around these different choke points, take over these choke points, whatever it is, it needs to be controlled. You know, China is just chomping at the bit. They're wanting to get Taiwan back under their control really badly. And I've been asking myself, China seems to be awful quiet. And I want to convince myself that it's because of our might, our military might. It's making them nervous. But I don't think that's it. I think they're sitting back and watching.

SPEAKER_01 19:20

I saw they put a some they they did some sort of space walk or something a couple of days ago, and they released something into the orbit that they didn't disclose before and haven't disclosed since what it is. Like whether it's like a nuclear device, like the launch capability type deal. There's there's all kinds of concerns about that. And then they tested yesterday an uh ICBM that reached like deep into the South China Sea, I think. I can't remember exactly where they said it landed. And then there was that conversation that uh they aired when Trump went over there a couple weeks ago or a couple months ago, where they basically said on live TV with Trump sitting there, like Taiwan belongs to us. It's our entity, and any attempt to say otherwise will not not end well or whatever it was. You know, so I think I I agree with you.

SPEAKER_02 20:10

They're just they're being diplomatic about it, but there's definitely something we don't have to have a disruption for these prices and market instability to happen. The mere possibility alone of it happening can move prices. And that's what we've kind of been seeing with Iran, especially in the beginning before it got to the point it is now, is the possibility of global war shot the price way above $100. And so it doesn't have to necessarily be something that's happening, it's just something that could happen, which I believed can be used as a panic tool to justify fluctuating the markets.

SPEAKER_01 20:50

That's what they do all the time. Oil and interest as the two things that power everything. Exactly.

SPEAKER_02 20:56

Oil takers don't change course overnight and production doesn't just appear instantly. Uh markets react immediately anyway, just like we said. So it doesn't really matter what is real or not, it's what the perception is, which has kind of always been the case. Now we're going to talk about the strategic petroleum reserve. The purpose for the reserve is an emergency buffer. That's not what it's been as of late. It's been a political tool. Just like when the gas prices got crazy and Biden started bringing petroleum reserves out, which depleted the petroleum reserves. Uh, as far as I know, they're still depleted to this day. They might be closer to being back, but they're still depleted. I know that Trump has a focus on that. Even the petroleum reserves have been used as a political tool internally in our country, and it's not a permanent supply. This is a supply that is set back for emergencies.

SPEAKER_01 22:00

Are currently less than halfway full at their lowest level since uh April of 1983.

SPEAKER_02 22:06

There you go. It's kind of interesting where these petroleum reserves are kept. The main reason for these reserves is for short disruptions, emergency situations, natural disasters on a large scale, and all that. It really is a national security thing to have these reserves, not just being the number one exporter, but also making sure that we have enough in case we have an emergency. So you can't replace years of lost production. Some of the modern examples of these disruptions are the Middle East conflict, Russia-Ukraine, LNG redirected towards Europe, shipping insurance premiums, attacks on commercial shipping. The story changes, but the market psychology doesn't. So what is the key takeaway from all this? The bottom line is oil markets are physical, oil prices are psychological. So let's take a little bit deeper dive into the Strategic Petroleum Reserve. Why does it exist? How is it used? When do presidents authorize releases? The U.S. Strategic Petroleum Reserve was created as a direct response to the 1973-1974 Arab oil embargo. In October 1973, the Yom Kippur War began. In that same month, Arab members of OPEC impose an oil embargo on the United States and several other countries that supported Israel. From 1973 to 1974, oil prices soar, gasoline shortages spread, and Americans experienced long lines at gas stations and fuel rationing in some areas. December 1975, Congress passes the Energy Policy and Conservation Act, which authorizes the creation of the Strategic Petroleum Reserve. In 1977, the SPR officially begins operations, and the first oil is delivered to the reserve in July. Before the embargo, the U.S. had very little emergency oil stockpile. The crisis exposed how vulnerable the country was to supply disruptions from overseas. The SPR was designed to provide an emergency supply of crude oil during major disruptions, reduce the economic impact of future oil embargoes over wars, strengthen U.S. energy security, reassure markets during supply shocks. So where is this oil stored? The oil isn't kept in tanks above ground. It's stored in a massive underground salt cavern along the U.S. Gulf Coast in Texas and Louisiana. Salt caverns are ideal because they're naturally sealed, stable, and relatively inexpensive to maintain. The Strategic Petroleum Reserve wasn't built because America wanted to store extra oil. At its peak, the SPR held more than 700 million barrels of crude oil, making it the largest government-owned petroleum reserve in the world. It's been tapped during events such as the 1991 Gulf War, Hurricane Katrina in 2005, and supply disruptions following Russia's invasion of Ukraine in 2022. The gas lines of 1973 didn't just change how Americans bought fuel. They changed how the United States thought about energy. Two years later, Congress created the Strategic Petroleum Reserve, and by 1977, the government was pumping crude into underground salt caverns along the Gulf Coast. Today, it's America's emergency fuel tank. Built because one crisis taught the country a lesson it never wanted to learn twice.

SPEAKER_01 25:46

Every day on the show, we're going to do something where we talk about how oil is basically in everything, whether it's something that you're you use on a daily basis, something that you're wearing. It's just things that wouldn't exist without oil and gas. Today's topic is just colors. From the neon blue of Gatorade to bubble gum pink to Twizzler Red to Bomb Pop Blue, every single fruit loop. How did Skittles turn a barrel of oil into tasting the rainbow? In London in 1856, an 18-year-old chemistry student named William Perkins was at home on Easter break. And as we all do on Easter break, he was trying to cure malaria in his kitchen lab. Turned out to be a total failure. And instead, he successfully created a nasty black sludge that was in the bottom of his flask. So when he went to clean that out with alcohol and poured the alcohol in it, it turned into an unbelievably brilliant shade of purple, which uh back in the day, purple was really just something considered for royalty. Perkins called the sludge that he created Mauveen and built up an entire system on it, learning how the chemistry of the different additives caused different colors to exist. Once other chemists figured out that they could do this, they started doing the same thing and you know looked at the situation and said, Hey, you know, we could take this stuff and grind it up and make crayons out of it. So that's how we got almost all the colors in the crayola box. Everything used to be made by coal. And once oil and gas came along, they figured out that it was cleaner, it was easier to work with. If you go in the grocery store and you see a package of Oreos with a brilliant color blue on it, that all comes from oil and gas. Every color that you see today across the world is primarily made of oil and gas byproduct.

SPEAKER_02 27:24

So you're welcome, world. Before we get out of here, here's the quote for the day Energy isn't local, it's global. And every barrel connects somebody. If you like this show, if you like what we're doing, if you want to give us some feedback or some suggestions, please subscribe, like, comment, and share. Follow us on social media at crude logic show. Join us tomorrow where we will connect everything we've covered this week markets, history, geopolitics, and what it actually means for working people in the oil field today. Until then, stay safe, keep drilling, and remember, it's only logic if it's crude logic. We'll see you tomorrow.