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The U.S. strategic petroleum reserve is ‘not there to manipulate gasoline prices’: Stephen Schork

In this article:
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The Schork Group Principal Stephen Schork joins Yahoo Finance Live to discuss crude oil market outlooks, in addition to examining the relationship between petroleum and gasoline prices.

Video Transcript

KARINA MITCHELL: Welcome back to Yahoo Finance. Well, according to data, prices at the pump could be starting to creep lower, but does the trend continue? And how low will they go? Here to help us discuss that is Stephen Schork, Schork Group principal. Thank you so much for being here with us, sir. So-- thank you. So we see here, regular is $3.34 a gallon at the moment. So what sort of sustained relief are we looking at, and does it drop below $3? And what drives it to that price?

STEPHEN SCHORK: Well, crude oil is the obvious driver for gasoline prices. On any given month, crude oil will account between 60% and 70% and maybe as high as 75% for the price of gasoline. So to get us below $3 at $3.34, we would need to see another $15, $16, $17 drop in crude oil, which would bring crude oil back down into the $50 barrel range. I certainly don't see that happening. And in fact, we had a massive sell-off not just in oil prices, but of course, in equities and so forth on that Black Monday following Thanksgiving.

And so we're starting to see some of the impact of that in gasoline prices at the pump. But since that massacre, oil prices have recovered about 25% to 30% of the declines. So therefore, the short-term pullback that we've seen in gasoline prices will see some knock on over the next week, next two weeks. But that will be it. Unless we see another significant downturn in crude oil prices, we're not going to see further declines in gasoline prices beyond the next couple of weeks.

ALEXIS CHRISTOFOROUS: So, Stephen, I wonder how much of what's happening in the oil pits right now is directly related to what President Biden did recently with some other countries, including Japan and China, and tapping the Strategic Petroleum reserves? I know that takes a little time to trickle down. They decided to put more oil, I think 50 million more barrels of oil onto the market. Has that-- is that being felt yet at the pump? And what kind of impact do you expect that to have?

STEPHEN SCHORK: It's certainly being felt at the pump now because the White House, the decision to release barrels from the SPR, they've been talking about it since August. So it was well telegraphed to the market. And so given that it was well telegraphed to the market, it's priced into the market. We're now starting to see fundamentally, physically, because those barrels are starting to move out now. Keep in mind, barrels have been moving out of the SPR for the last two months as part of a bipartisan agreement-- budget agreement. So we're already taking out 20 million barrels of oil from the SPR with, of course, more to come.

The proposal or the move to take 50 million barrels out of the SPR is destined to fail. We have to keep in mind, the SPR is not there to manipulate gasoline prices. The SPR was created in the mid-1970s in the wake of the Arab oil embargo. And it is only meant and up until this administration, it has only been used to mitigate, offset short-term, unexpected disruptions in the flow of crude oil. Once again, it's not made to manipulate gasoline prices. And in the long-term, it's going to create higher gasoline prices because what we're doing now is putting oil on the market. It's a short-term gimmick. It's a short-term fix. What is really at issue here is the lack of investment going forward in this industry.

So the administration has violated the first lesson in economics. And that is capital goes where it is welcomed, and it stays where it is well treated. Up until the last couple of months, the administration was forced to learn the second lesson of economics-- scarcity. So with the going forward, what we're doing is we're depressing investment even further by dumping our rainy day supply of oil onto the market, therefore discouraging domestic production going forward, discouraging investment. And there will be an absolute knock-on impact from this.

So we're doing a short-term fix now, but in the long-term, we're actually making the situation even worse, and of course. So not only are you artificially depressing production in the here and the now, but the rapid inflation we're seeing across the entire complex is raising the cost to produce more. So the price of steel, the price of labor, are all rising. And this cost has to get passed along to the consumer. So once again, yes, we'll see some short-term juice to the market, lower prices. But ultimately, we're sowing the seeds for higher prices over the next year, if not next two years.

KARINA MITCHELL: And OPEC Plus was none too happy about the president and co's decision to release some of this Strategic Reserve. What wrench can OPEC Plus throw into how oil prices fare going into next year? It was a big surprise that they actually agreed to hike output in January by 400,000 barrels.

STEPHEN SCHORK: Yeah, they were going to keep to their plan. And there was some speculation because I think they were caught flat-footed by the administration's move to release the barrels. I think their move to maintain the status quo and maintain their scheduled production increase was a terrific move at this point. And it's also a great move for the economy because they see worldwide demand for their product rising. So they're going to continue, but they're doing it in a orderly manner.

And therefore, what's going to happen is as demand continues-- hopefully we don't get a pullback-- but if demand continues to grow, what OPEC has done essentially has called the US's bluff, that you're trying to manipulate prices by putting an artificial amount of oil non-denominated by the market onto it. And now you cannot come and blame us when oil prices continue to move higher, as I believe they will, in the next year to over $80 a barrel. So at this point, there is not much you can do.

And keep in mind that there's a certain level, a certain elasticity, price elasticity, that OPEC is willing to accommodate. They simply do not want oil prices that high because all higher oil prices-- and when I'm talking higher, I'm talking over $90 a barrel or $100 a barrel, which is what you would see. And finally, that would retard demand going forward. And it would also increase the move into substitutes, of course, electric vehicles and hybrids. And OPEC doesn't want that.

So they're in the process of-- everyone-- you know, a lot of lay people think that, oh, OPEC wants prices at $200, $300 a barrel. No, they want prices a high enough level where they could get a return on their investment, and they don't kill demand going forward. So it is a balancing act. So OPEC's decision to go forward with their production despite what the US has done is a very smart move that's going to keep oil prices-- a potential lid in prices. I do think $80 in the new year certainly, $85 absolutely. Above $90, you begin to worry about demand and the economy in general.

KARINA MITCHELL: Yeah, and some have even predicted $100 a barrel oil. So we will have to leave it there. Stephen Schork, the Schork Group principal, thank you so much for your time today.