Forgive me, but today I want to tackle two wholly unrelated subjects. Since this column is about oil, I’ll keep energy as a master theme. But one subject deals with the present and immediate future, while the latter deals with history, and the flawed representation of same.
Attack of the Cone Heads . . . .
We now have three separate tropical systems that you will see displayed ad infinitum on computer screens and on television through week’s end. A month ago, the genesis of such systems would have spawned price rallies of perhaps $5-$10 bbl for crude oil, and 25-50cts gal for gasoline futures and spot prices. Both are still possibilities, although not probable at this point. Together with the identification of tropical systems on the map, we have to get used to “probability cones”. I was transfixed by a WeatherChannel cone when I worked out on a treadmill at lunchtime. Throughout the remainder of tropical high season, I will be a cone head.
Oil traders need not worry about Hurricane Flossie in the Pacific, unless one is on holiday with a three-masted schooner (Note: I grew up in the 97 percent Polish hamlet of Wallington, N.J. so I have no clue as to sailing jargon, but that sounded authoritative. We Poles may be master shipbuilders; but we’re not much for recreational sailing.)
A storm in the Gulf of Mexico that is to be called Erin, should it reach tropical storm status, is more of a nuisance than a major threat. Some offshore platforms may be evacuated, and much rain and gloom could accompany the low pressure. But it is unlikely to have much of an impact on oil and natural gas production, or Gulf Coast refinery output.
Tropical Storm Dean is another matter entirely. The probability cones are wide, and last night, one sophisticated computer model had the storm headed to Brownsville, Texas while a separate expensive model put it on a collision course with Cape Cod.
The cone that I witnessed this afternoon appeared to take it on a path that might graze Puerto Rico, where the population has already had a tough summer, thanks to the outbreak of Dengue Fever.
I have no idea whether the conditions could permit this storm to intensify into a major hurricane. But, do not breathe a sigh of relief if it avoids the U.S. Gulf Coast and merely threatens Atlantic targets. We learned during 2005 that a major storm could inflict tremendous oil price pain if it comes ashore in Texas or Louisiana. We might forget a lesson learned in 1988 - - namely, that there are other strategic supply organs without which we would struggle to have a supply balance. In this case, the most dangerous path for the U.S. fuel balance would be a cone that took a major storm over the island of St. Croix.
Hurricane Hugo knocked out the huge Hess refinery on that island in 1988. The refinery is now a joint venture of Hess and PDVSA, but it is even more crucial to the U.S. than it was some nineteen years ago. It is among the largest refineries in the world, with about 500,000 b/d of crude oil capacity, and it is among the most sophisticated plants as well. Simply put, a hurricane strike, or any disruption in operations at St. Croix, could have devastating consequences for the U.S. The refinery even produces the notoriously difficult-to-make California spec gasoline and diesel.
Again, the odds are against any strike on this small portion of the planet. But the cone heads might do well to closely monitor any storms that threaten this part of the world.
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I’m about half way through today’s screed, and I haven’t talked specific prices. Today’s average gasoline price nationwide was $2.767 gal, down 46cts gal from Memorial Day 2007 and about 30cts gal lower than last year.
Don’t spend those year-on-year savings yet. Labor Day 2006 saw average prices of just $2.74 gal, and I believe we’ve already seen most of the Summer 2007 drop. Halloween 2006 produced an average retail price for regular of $2.21 gal, and I do not believe we will get that low unless there is a financial meltdown. 2007 prices may be above 2006 prices by the time we get to Labor Day, particularly if the tropics remain active.
A Retrospective Problem . . . .
The Producer Price Index (PPI) was released this morning. I do not pretend to be an economist, so it usually flashes on my screen without inspiring any reaction. But today was different, and for good reason.
In English literature, one of the terms that we learned as we examined Shakespearean plays was anachronism. As I recall, the classic anachronism was the placement of a clock in King John. Clocks did not then exist. An anachronism is an image or data set that is misplaced according to time. If you ran across the term “powertrain” in the Dead Sea Scrolls, I would assume that would be an anachronism.
I have no idea how relevant and accurate the PPI data is for some of the wonderful items listed in the embargoed press release that came from the Bureau of Labor Statistics. Some of the items that saw significant price increases include imitation cheese, toilet preparations (what precisely does one prepare while at the tank?), and plastic resins. Thankfully, the price of fresh fruits and melons plunged by nearly 15 percent in the month, and that may ultimately help drive toilet preparations lower.
But, I digress. I’m interested in fuel prices and that is where I find data that represents a 21st century anachronism.
First of all, the PPI puts far too much emphasis on crude oil prices in its report. It notes that crude oil prices rose 11.8 percent in the July, and that increment was largely responsible for the overall increase of 2.5 percent in the energy component.
It appears to me that including crude oil in the index no longer has the relevance that it had through say 2002. The inclusion was probably based on the notion that crude oil price increases would take weeks to show up in finished products like gasoline, diesel fuel, and jet fuel. But the 21st century has produced a “virtual” market - - where price increases (or decreases) are passed along immediately. It has also brought about a huge disconnect between the cost of the raw product (crude) and the finished fuel.
I can forgive the data gatherers for their failure to catch up to the virtual world. But the rest of the oil data appears incredibly dated, and that casts doubt on my faith in the representation of prices for finfish, and vegetables, and commercial furniture, and gypsum, and asphalt felts and coatings, et al.
The PPI data states that July wholesale diesel prices rose by 6.8 percent in July 2007. OPIS follows tens of thousand of wholesale diesel prices at 350 locations in the U.S. and we do it every day. The difference between July 1 and July 31 prices was indeed an increase, but it was a modest increase of 3.74 percent.
The real problem shows up for wholesale gasoline. The Bureau of Labor Statistics says that the indexes for “gasoline, jet fuels, and liquefied petroleum gas turned up in July.” Not true. I don’t have time to crunch our data sets for jet fuel and LPG, but I can quickly and accurately report that wholesale prices for gasoline fell by 6.73 percent during the month.
That makes me suspicious of those toilet preparations yet again.