Wednesday, April 19, 2006

Gas Prices Part II

Oil and gas prices remain poised to hit higher highs for the foreseeable future and despite the rhetoric placing much of the blame on the oil companies I think it is important to remember the key contributors to the record prices.

1) US Consumers - We are a nation that likes to blame McDonald's when 40% of our population is obese but like it or not we are the biggest factor in high prices. We simply consume too much oil - directly in the form of gas for our inefficient vehicles and indirectly through our consumption of products manufactured in China (which is using more oil every day because of our demand for their inexpensive goods).

2) Market traders - Oil trading has become increasingly more volatile as the volume of data points has grown substantially over the last 10 yrs. In the past, inventory data was the most meaningful source of oil data for the markets, however today traders can react to a headline from Nigerian rebels or a quote by Pres Chavez.

3) Big Oil - Clearly they did not explore enough in 1990-2000, but beyond that I don't see much blame to lay at their feet.

4) International and Domestic leaders - I had left this out of our previous discussion partly to avoid any partisan diatribes, but the impact is clearly substantial. I estimate that 10%-12% of the current price of a barrel of oil is due to market concerns that the US could possible strike Iranian "nuclear" facilities in 2006. While I discount this as having a very small chance (no one wants another war going into the mid-term elections) the markets are pricing a 20-40% chance of this occurring.

Iran represents an oil supply of 2.5 million barrels/day. The "excess daily global supply" is somewhere around 1.5 million barrels/day. It is clear to see that any disruption of Iran's supplies could have a dramatic effect on the global markets.

I hope this helps...

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