I was brutally interrogated today by print and electronic media (just kidding). Some of the ruminations will get distorted by sound bites and words taken out of context. For some depth, here are twelve questions that were asked, or should have been considered, if they were not tendered.
Q. Where are crude oil prices today, and where are they headed? A. I wish I knew. The truth is that oil prices in general, and crude prices in particular, are being driven by the same collective forces that drive stock and bond markets. West Texas Intermediate (WTI) crude closed at $95.46 bbl today, down 91cts bbl for the day and about $3.00 bbl below the record high established earlier this week. It is also a price that I would have described as excessive a month ago.
Q. How about gasoline prices? A. The average U.S. retail price hit $3.06 gal today and it will probably surpass $3.10 gal this weekend. Most states find prices that are up 30cts gal in one month, and about 87cts gal above the same day last year. Wholesale gasoline prices have actually outperformed crude oil in the last week. Bulk gasoline (ex tax) trades for anywhere from about $103 bbl at the Gulf Coast to as much as $110 bbl on the West Coast. Should these numbers persist, it would point to a spectrum of prices ranging from $2.90 gal to more than $3.30 gal depending on location, state and local taxes, etc.
I have to stress that Autumn is traditionally a time of year when gasoline prices drift lower and provide consumers with a bit more cash to spend for the holidays. So far, 2007 has bucked that trend, thanks principally to the rip-roaring crude market. I still believe that a trader epiphany is out there - - and that gasoline prices will have a soft midwinter underbelly with some downdrafts.
On this morning’s Today Show, Wall Street guru Jim Cramer predicted that retail gasoline would charge through $4.00 gal within six weeks. I believe that he is full of booyah! Next Spring, however, we will see gasoline advance to prices that should surpass all time records. For now, I’m sticking with a $3.25-$3.75 gal range for that peak.
Q. What is the outlook for diesel, heating oil, and jet fuel? A. Prices for all of these products are at all-time highs. For example, jet fuel costs airlines about four times what it cost in November 2002. The nationwide diesel price will move above $3.40 gal this week and some states find prices closer to $3.75 gal. Since virtually all commercial goods are moved via truck, rail, or airline, this translates into significant cost inflation for everything from apples to zithers. The northeast, where heating oil is used by large chunks of the population, now finds retail heating oil getting delivered at $3.00-$3.30 gal.
Q. How much of this has to do with speculation? A. The term gets inappropriately attached to all of the buying and selling of oil that isn’t done by oil companies, merchants, or consumers. In reality, oil - - and specifically crude oil, gasoline, and heating oil futures contracts - - have become a major asset class that attracts investment money from all over the world. Some of that money represents speculative behavior, but much of it is being parked in oil because money managers perceive energy to be a safe place to put money.
To give you some sense of scale. Worldwide demand for crude oil is around 86-million bbl per day. The last couple of days have each seen more than 700-million bbl of crude trade in each 24 hour period. This is exponentially higher than it was a few years ago.
Q. Do oil prices move higher when the U.S. Dollar falls? A. That can often be the case. The Dollar is the currency that oil trades in, and a weaker Dollar versus the European currency can mean that European buyers (one example) can pay more for oil when their currency strengthens versus the U.S. Dollar. Some of the Fall run-up can be attributed to these fluctuations. But the Dollar is down about 10% versus the Euro and oil has tacked on more than 40% of additional value since late August.
Q. What about geopolitical instability? A. We’ve lived in a geopolitically unstable word for several decades. At any moment in the last ten years, some one could have latched on to Nigerian labor unrest, Venezuelan disruptions, Chinese demand growth, Mideast saber rattling and many other ongoing problems, and attributed oil price rises to same. And yes, if we lost Venezuelan oil or Nigerian oil or Iranian oil, we would find the energy wolf at the door. But commodities market have a propensity to “cry wolf” and that shouldn’t be forgotten.
Q. Is demand to blame? A. It depends on who you ask, and where you look. Overall U.S. petroleum demand has actually softened in the last six weeks or so. Gasoline demand is by most measures flat to last year, and diesel/heating oil/jet fuel demand is lower. A typical year finds demand growth of about one percent or more.
On a global basis, it is much more difficult to gauge real demand. Other countries like China and India are clearly using more fuel, but there is no precision in the measurements of how much more gasoline and diesel they are using. Many of the cheerleaders for higher prices (most of the talking heads you’ll see on TV) conveniently grab statistics that can’t be verified.
Q. What is the tipping point for U.S. gasoline prices? A. We’ve found that a significant portion of the population drives less when retail prices advance above $3.25 gal. The laboratory for this calculation has been the West Coast where prices have moved above $3.25 gal in the last two summers. We’ve never dealt with prices above $3.00 gal on a national basis in the October through March period, and any tipping point can be a moving target.
Q. Will ethanol help? A. Ethanol will displace some of the gasoline demand in the U.S., but logistics and infrastructure need to catch up. Wholesale ethanol prices are under $2.00 gal and wholesale gasoline is around $2.50 gal. As long as this relationship persists, more states will find suppliers racing to implement E-10 (10% ethanol, 90% gasoline blendstock) grades of gas. I won’t go into the politics since covering both sides would be tantamount to calculating Pi.
Q. What can a consumer do to help? A. Curb a little excess in your life and think about driving responsible vehicles. You don’t need to get a scooter --- you can simply ramp down from vehicles that are as big as a small deli to more reasonable transportation.
Q. How will this impact the economy? A. That’s a question for qualified economists. However, I would stress that cheap gasoline is something that is regarded as a birthright by many Americans, and retail gasoline prices are “in your face, every day, wherever you live.” Economists properly note that expenses for gasoline or even heating oil don’t represent the high percentages of disposable income seen in the 70’s and early 80’s. But they don’t calculate the emotional component of high fuel prices - -it is like a Frank Capra movie that has been hijacked by Quentin Tarantino.
Q. How does the volatility in the stock market fit into the mix? A. The misconception is that oil moves higher and major stock indices move lower and vice versa. The reality is that it is very difficult for crude oil, or gasoline, or diesel to move higher when the Dow, S&P, or NASDAQ are getting battered.
All of the prognostications about $100-$125 bbl crude oil discount the possibility of a U.S. or worldwide recession. Keep that in mind.