Sunday, March 06, 2011

Black Gold Living Up to its Nickname

Anyone who drives to work, who eats food that isn't local grown, raised or canned, travels or buys pretty much anything that has to be shipped is seeing the sudden effect of the rise in crude prices.

Here is my quick and dirty breakdown of the crude oil situation globally.

* The world has lost access to about 1/2 of the daily shipments from Libya.

* This represents only about 1% of global supply.

* Every dollar rise in the price of crude oil adds about 2.5cents to the price we see at the pump.

* Every penny increase at the pump is effectively a $1.5 billion additional "tax" on US consumers.

* The 33 cent jump in gas prices over the past 2 weeks will subtract about $50 billion from the wallets of US consumers if it holds.

* There have been 5 occasions where the price of crude oil doubled in less than a year. Four of the five times, the doubling of oil prices led the US into a recession (the one exception was 2005 when we were in the midst of the housing bubble). Oil prices have now doubled again in less than 2 years for a 6th time. Will this lead us back into recession?

* Way back when a gallon of gas average $3.10 in the good old days of Jan 2011 this was the rough breakdown of the cost of a gallon of gas:

67% was the cost of the crude
13% was due to taxes
11% was the cost of refining
9% was the cost of distribution and marketing

Below is a chart highlighting the cost of a gallon of gasoline and it's component pieces. What is really startling is that since 2007 we've only had one brief period where gas prices dipped meaningfully. Other than that, we've been (un)comfortably above $2.50 for most of the past 4 years.

Here's one of the problems with this sudden surge in oil -- there's actually plenty of oil to go around right now. US stockpiles remain high and the global supply remains mostly intact.

However, as we saw last time oil prices spiked, we may have to blame the speculators.

"The Crude Oil non-commercial net specs are at an all time high: well over 100% more than during the oil time highs in crude in 2008. This means that speculators are anticipating an even more powerful move higher than that seen in the summer of 2008 when Crude hit $150."

You'll recall what I said on February 24th

"My biggest concern about the oil complex is not necessarily total supplies but rather the increased levels of speculation that could take place in the oil markets. As money chases oil, the price could continue to escalate despite improvements in supply." This appears to be the situation today.

Other things to keep our eyes and wallets on

1) Bahrain - Rumored settlements between the Shia rebels and the ruling party could set up more important protests Kuwait. That could eventually spark more protests in a country that rhymes with Fraudi Marabia.

2) Speaking of Saudi Arabia, the talk coming out of that country will be interesting leading up to March 11th and March 20th. There are plans for some type of revolutionary protest on March 11th in the Shia province in the Northeast portion of the country. Saudi Arabia will do everything in their power to maintain the status quo and they have banned all protests in the country. Whose side will we take in this battle - the Sunni's that keep the oil flowing or the Shia protesters?

3) Watch for talk that the US will tap our strategic petroleum reserves. This normally has the desired effect of calming energy markets but since we can only draw a maximum of 4 million barrels/day out of reserves and we are using 21+ million barrels per day the impact of tapping our reserves could be limited.

Cheers and good luck finding gas in the $3.60 range!

1 comment:

Atlanta Roofing said...

As to cutting the umbilical cord to the rest of the world, that may be tougher than it seems. For one the US needs a lot of raw materials, including some that are only produced abroad for its more sophisticated technologies . And then there is the employment generated by exports. In 2009 GDP was 14.1 trillion and exports 2.1 trillion. That’s about 15 percent of production which in employment terms, and based on an overall labor force of 130 million, could mean as many as 19 million jobs.