Commodities runway
First of all, thanks everyone for subscribing! I’m not totally sure what I’m going to actually do with this substack yet. For now, I’m just going to take my longer tweet threads and mostly copy-paste them here with light editing. So, this is a collection of ~3 of my tweet threads on oil, storage, and so on.
I started thinking about this due to Erik Brynjolfsson’s very interesting tweet about the possibility of using the US’s strategic petroleum reserve to trade against futures curves. I lean towards this being not super effective, for the following reason: oil is actually super expensive to store, so above-ground oil reserves are surprisingly small.
According to Google, the US uses roughly 20mil barrels of oil a day. Cushing, OK is one of the most important oil storage hubs. It's the delivery point for WTI futures contracts, the most liquid US oil futures contract. Cushing's total capacity is around 90bil barrels. So Cushing, OK can store at most around 4.5 days of US oil usage!
The entire US strategic petroleum reserve is around 700mil barrels. So if I have my numbers right, the entire US reserve is only sufficient for around 35 days of US oil usage! This is a miniscule amount of reserves, if you think about it.
So if I have my numbers right, the timing on trading using the SPR is a bit tricky: it's a bit hard to use your 1-month oil reserve to try and arb prices 5 years out in the futures curve.
At some level, the oil futures curve is wonky precisely because storage costs are high, and these kinds of arbs are hard and costly to do. If oil storage were cheap, people would store a bunch of oil, do these arbs, and we would rarely have super backwardated futures curves.
I googled this a while back and apparently storing a barrel of oil for a year above ground costs around $3/barrel. So if oil is trading roughly $50/barrel you're losing >5% a year just on holding costs. So it makes sense why nobody stores much of it. The best way to store oil apparently is just to keep it in the ground until you need it. So anecdotally, the way these price spikes are fixed eventually, is that wells that aren't worth drilling at $50 are worth drilling at $100. So a bunch of wells start pumping, and push prices down eventually. But this takes more time, which is why oil prices have such wild short-term swings, which aren't reflected in the back end of the futures curve.
Caveat: I googled all this stuff a while back for fun, this stuff is not totally my field of specialization, so I could be pretty off on some of the facts in this post.
Generalizing a bit, you can sort of read out storage costs from the shape of futures curves. Oil has lower storage costs than gas, which is lower than electricity.
Oil curves are weird at yearly horizons, hence, oil makes sense to store for months, but not years.
Gas curves are seasonal (prices high in winter, low in summer). We can thus infer that gas is costly to store even for a few months, since winter prices have to be pretty high relative to summer for anyone to bother doing that.
Electricity prices have intraday seasonality: daytime electricity is more expensive than nighttime electricity. Hence, batteries sufficiently suck that you can't profitably buy night electricity, charge your batteries, and uncharge to sell it in daytime!
Commodity runway
This led me to then think about other commodities besides energy. I asked in this poll: what's the size of the aggregate canned/preserved food stock in the US? Say there's nuclear war and we can't produce any food from farming, etc. How long can the US population stay alive using the stock of canned food in homes/Walmarts/warehouses/etc?
A clever answer points to the idea that, for most of history the answer to this must have been just under 12 months, since there's one harvest season a year. So there’s no real point in building more than a year's storage capacity.
(Aside: well, of course, there is a point, which is to protect against a bad harvest or something. That's probably the 1200's equivalent of our "black swan" events: a low probability but very bad event, that it's hard to have good incentives to insure against in good times)
So you can ask this question more broadly of different commodities. Take the set of resources we generally use to stay alive (water, food, medicine, gas, oil, electricity) How much "runway" does the US has for each? Some of my guesses:
<1 day of electricity runway: if every charged battery were summed up, I doubt it'd cover US electricity use for a day.
1-2 months of oil runway in SPR, as we discussed.
I'd guess 1-12 months of food runway.
What do people think about other commodities?