1. Oil and the Global Economy
The markets were nervous last week so that even dated news such as the Saudis pumping more oil or Iranian exports declining triggered sharp price movements. By week's end NY and London prices were down a dollar or so with NY closing at $106.87 and London at $125.13 after having touched a high of $127.06. Only NY gasoline futures continued climbing to new highs for this time of year and are now only some 20 cents a gallon short of all-time highs set in 2008.
With the Eurozone debt crisis out of the headlines for now, attention is focusing on the Iranian confrontation which was quieter than usual last week. Oil prices, however, fell on Thursday after the Saudis restated for the umpteenth time that they can raise their production to 12.5 million b/d, if needed, thereby offsetting any loss of Iranian exports. On Friday, oil prices rebounded on reports that Tehran's exports in February were down by at least 300,000 b/d from last fall.
Fears are rising that persistent high oil prices -- Brent crude has now been over $100 a barrel for more than a year -- will eventually lead to a new recession. Oil stockpiles, especially in the EU, are low and, even though Libyan oil is mostly back to normal, a series of smaller outages around the world now add up to 1.2 million b/d less output than would be expected. If prices remain high for the rest of the year, the cost of oil imports for the lead economies will grow to $1.5 trillion this year. The IEA estimates that the EU will spend $502 billion on oil imports this year as compared to $472 billion in 2011, which on an annual basis is well beyond 2008 when the world economy went into recession.
The US's natural gas glut is coming in for increased attention as record breaking temperatures have cut the demand for heating gas dramatically. With prices at record lows -- down 46 percent in the last 12 months -- major producers continue to curtail drilling just for gas. Rigs drilling for gas have fallen from 811 to 663 so far this year. The newest problem to arise is where to store the over-production. US natural gas storage facilities usually finish the winter at 30-40 percent of capacity after the heating season is over. This year it looks as if the facilities will close out the winter of 2011-2012 at close to 60 percent, raising the possibility that prices will either fall still lower later this year, or production will have to be curtailed.
In the short run, lower prices will drive electric power producers to consume more natural gas in place of coal. The longer term solutions such as increased exports of LNG or building of more natural gas vehicles will have to await the construction of liquefaction plants and distribution facilities.
2. The Iranian Confrontation
The bombast surrounding the confrontation was lower last week as attention turned to the ever tightening sanctions being applied to the Iranians. As Tehran is loath to admit that the sanctions are having an effect, as such an admission would hurt its bargaining position, most attention has been on just which countries are curtailing their imports of Iranian crude and by how much.
Tehran's exports are reported as having increased in January, but then fallen by around 300,000 b/d in February. Iranian oil production seems to be continuing apace as there are reports that the amount of oil going into Iran's floating storage is increasing. This, of course, reduces the number of Iranian flagged tankers available to export oil to other countries.
As the Iranians are having trouble paying for imports, a wide range of products that normally flow into Tehran are backed up due to exporters' inability to get paid for shipments. While the Iranians have long experience finding their way around sanctions, as the months go on this set of sanctions seems likely to have a serious impact on the Iranian economy and lifestyle. While the curtailment of oil exports is likely to be at least partially offset by higher prices, the inability to import vital goods such as medicines and foodstuffs will have an impact on a society which has become highly dependent on foreign imports.
Last week, the EU foreign ministers adopted detailed rules on how the ban on Iranian oil imports will be handled after July 1st. For now, most analysts believe that the oil embargo will eventually cut between 800,000 and 1 million b/d from Tehran's normal exports of 2.5 million b/d. Under a new US law, foreign nations have until June 28th to demonstrate that they have significantly cut back on Iranian crude imports or face having the banks handling Iranian crude transactions cut off from the US financial system. Washington announced last week that the EU and Japan are meeting the requirements of the law and expressed the hope that China, India, and South Korea would follow suit.
While publicly rejecting sanctions that are not approved by the UN, China has cut back significantly on its Iranian oil imports, perhaps out of fears of what could happen to their Middle Eastern imports should hostilities arise and a realization that Iranian intransigence is behind most of the trouble.
3. Gasoline and the US economy
The controversy between falling US motor fuel consumption and the "ongoing economic recovery" flared last week with the release of an EIA admission that they have been underestimating the size of US oil product exports and consequently overestimating the drop in US consumption this year. The problem has been that the weekly "consumption" number supplied by EIA measures the amount of gasoline and other petroleum products moved out of the refineries after which they may go either to export or to domestic consumers.
In 2010 US exports of gasoline and diesel began to increase sharply, leading to over-estimates by the EIA of the amount of motor fuel that was being consumed domestically. The numbers were eventually corrected from monthly export figures collected by the census bureau and the EIA adopted a new and more accurate methodology for its estimates of oil product exports in August 2011. The problem was that comparing 2012 consumption against inflated domestic consumption figures for the second half of late 2010 and the first half of 2011 resulted in calculations showing large drops of US gasoline consumption when measured year over year.
This did not sit well with many Wall Street analysts who continue to talk about an ongoing economic rebound at the same time the EIA was saying that motor fuel consumption in the US was down by circa 7 percent this year. The EIA points out that using the new methodology, US gasoline consumption in January 2012 should have been recorded as down by 4.3 percent rather than 7 percent or so in its weekly reports.
The other, and theoretically more accurate, way of looking at US gasoline consumption is MasterCard's Spending Pulse which compiles gasoline sales data from 140,000 US gasoline stations on a weekly basis. Interestingly, MasterCard reports that US gasoline consumption over the past four weeks was down 7.8 percent as compared to the same four weeks in 2011 suggesting that consumption is indeed falling despite the problems with the EIA data.
US consumer spending on gasoline consumption as compared to last year is not up all that much, as the drop in consumption is partially offset by the 30 cent a gallon price increase over the last 12 months. Last year at this time Americans were spending about $1.35 billion a day on gasoline. It is now about $1.36 billion a day. Informed observers predict that gasoline prices will peak this year somewhere between $4.05 and $4.24 a gallon -- unless the Middle Eastern situation, or possibly the East Coast refining situation, gets worse. Then we could see national averages approaching $5 a gallon. This would increase our collective daily gasoline bill to about $1.5 billion in the best case and $1.9 billion if things go really bad -- and we have not even gotten to the question of hostilities in the Gulf. If the prevalent conjecture that gasoline could go to $8 a gallon should the Straits of Hormuz ever be blocked, we would be left with a theoretical daily gas bill of $2.8 billion and a lot of economic damage. Our 8 million b/d of gasoline consumption would have plummeted long before prices reached the $8 level.
In recent days there have been numerous stories in the mainstream media expressing skepticism that more domestic oil drilling would help lower gas prices which emerge from many factors worldwide. Increases of a few hundred thousand b/d in US shale oil production are of minimal significance in a world where demand has been increasing at circa 1 million b/d each year and new production is just offsetting depletion. A few writers have tried to make the case that US gas prices, when corrected for inflation, are still way below those of 30-40 years ago, but generally ignore the idea that prices will likely go higher before the year is out.
Alarm bells are starting to sound about the dangers persistently high gasoline prices pose to a possible economic recovery. Last week the IEA and IMF weighed in with warnings focused on the fragile EU economies. In the US, the Wall Street Journal noted that "rising oil prices haven't stalled the US economic recovery...but that doesn't mean they won't."
Quote of the week
"There's not a good argument here for business as usual... We think of optimism as a virtue. It's a trait of people who don't give up, a better way of thinking. But optimistic means something else when you're talking about science. When a scientist decides that an estimate is optimistic, she's applying that label in relation to two other possibilities: pessimistic, and realistic. Optimism isn't the ideal here."
- from Maggie Koerth-Baker's new book, "Before the Lights Go Out"
The Briefs (clips from recent Peak Oil News dailies are indicated by date and item #)