This year’s fuel price apocalypse arrived early. The last week of February delivered the largest weekly gasoline price increase – 19.7cts gal - - since Hurricane Katrina knocked out much of the U.S. Gulf Coast refining capacity on Labor Day weekend 2005. February concludes with an average price of $3.3675 gal, up nearly 67cts gal from last year.
We begin March 2011 at $3.375 gal, exactly 67cts gal above where we began March 2010.
I still believe that events in the Mideast, along with lots of sloppy money, and unwarranted fear, have all combined to simply move up the annual cycle for Petronoia, a term I coined in the 1990’s that was stolen by George Clooney and used in his incomprehensible movie Syriana. I’ll elaborate a bit more on these topics in the Question & Answer session that I’ve provided below.
But first, let’s put today’s numbers in perspective.
n OPIS calculates that Americans spent about $32.3-billion on gasoline in February 2011. That compares with $27.1-billion in February 2010, and is more than $12-billion above the February 2009 expense of $20.2-billion. Even in the runaway year of 2008, and accounting for the extra day in Leap Year, the February expenses were lower. For a look at current gasoline prices, visit www.fuelgaugereport.com If you need to crunch numbers for an economic study, contact our retail director, Fred Rozell, at 732-730-2568, or via email at frozell@opisnet.com We have a virtual treasure trove of granular historical data.
n Should we reach $3.50 gal, in say March, it would equate to a monthly expense of approximately $41-billion. A $3.75 gal average price would add up to about $44-billion. A $4 gal price puts the cost of fueling up for 31 days at about $47-billion.
n This year has seen what I would call the “Cabernization” of crude oil. The difference in price between grades of crude varies almost as much as the value range for California Cabernet Sauvignon. As I write this, the price of heavy sour crude in Canada is worth about $70 bbl, and the price of light sweet crude on the Northern Atlantic is close to $112 bbl.
Now, let’s look at some commonly asked questions, as well as some of the questions that should be asked, but are often ignored:
Q. What has brought prices to this point?
A. The second half of 2010 generally saw global demand grow (almost all of the growth was in emerging economies) and that sent U.S. and offshore crude oil prices to just over $90 bbl. The first two months of 2011 have seen money gush into commodities like oil, and lately, violence in North African and Mideastern countries has provided another boost beyond the money push.
Q. It seems as though prices soared once Libya slipped into chaos. Why is Libya such a key?
A. First of all, consumers need to realize that crude oil is not an element that appears on Mendeleev’s Periodic Table. The difference between one grade of crude and another can be substantial. The world has about 5-million barrels per day of extra crude oil production as we start March, but Libya produces a very special variety of light sweet crude. Almost all refiners can process light sweet crude, since it doesn’t require much sophistication in the equipment. Most fields generate heavier crude and more sour (higher sulfur) blends than comes from the deserts of Libya.
Much of the extra oil in OPEC or non-OPEC countries’ pockets is heavy sour crude, or medium sulfur crude. Many of the Mediterranean refineries were built for the light sweet crude that Libya produces, and they can’t run some of the other blends that might be released from Saudi Arabia or any other countries with some additional production.
If you have trouble visualizing this, try my crude-as-pants analogy. There is no shortage of pants in New Jersey, but one needs to extensively canvass the market for trousers with a suitable waist line that will fit Governor Christie.
Q. Crude oil futures are worth only about $97 bbl as March begins. I don’t recall seeing gasoline prices this high with crude oil values at less than $100 bbl. What gives?
A. The biggest paper market in the world is for West Texas Intermediate (WTI) crude futures that trade on the N.Y. Mercantile Exchange but this is hardly a dominant world blend. This U.S. benchmark has, for the moment, been rendered broken. WTI, and other lookalike blends, are trapped in the heartland of America and Canada. These grades can’t be shipped readily by pipeline to the large coastal markets. Meanwhile, the price of similar crude blends on the high seas is in the $110-$113 bbl range. The most commonly quoted price is for Brent futures, which trade on the InterContinentalExchange or ICE, as it’s known.
Many of the refineries that operate at the U.S. Gulf Coast or on the East Coast depend on light sweet crude. Before they even refine the crude, they face a raw cost of $2.65-$2.70 gal (there are 42 gallons in every barrel). Hence, you see higher prices on the coasts than you do in some portion of the nation’s interior.
Q. Where do you see prices heading this spring and summer?
A. If unrest and violence are limited to Egypt, Algeria, and Libya, we might expect that the peak for crude oil is in the $120-$125 bbl level. Earlier this month, we saw prices approach $120 bbl for Brent crude. I suspect that WTI crude has a peak price that is about $10 bbl shy of this level.
If crude oil does indeed have a limited upside of $110-$125 bbl, depending on the variety, that would suggest a peak pump price in the U.S. of between $3.50 gal and $3.75 gal. There will be higher numbers in places like Sausalito, California; Greenwich, Connecticut; and downtown Chicago, but average prices should not match the highs of 2008 (the peak U.S. price was $4.11 gal in July 2008).
Q. What happens if the unrest and violence spread to Saudi Arabia?
A. That would render all oil predictions moot and create an entirely new calculus for the world. To a certain extent, there is probably a “fear premium” built into the price of crude and gasoline because of this possibility. However, it is not a probability.
Q. Why are there so many predictions of $4 gal and even $5 gal gasoline?
A. There’s plenty of blame to go around. There are books to promote, and newspapers or TV segments to sell, and there is substantially more interest in the premise that we are on the threshold of a new normal.
A baseball analogy is appropriate. We haven’t had a .400 hitter in the major leagues since Ted Williams bested that number in 1941. No one is ready to suggest that a modern player can hit .500 and yet we see similar logic in the field of U.S. pump prices. I suppose there is a magical quality to a $5 gal price.
Q. Have financial companies played a role in the oil price run-up? Every time I see a study published, its content suggests that speculation plays little role in the worldwide price of oil.
A. Those studies are generally funded by individuals or institutions who would like to keep free markets unfettered, regardless of consequences. Every year, we see this argument, and there are elements of the “Ca Ca Chronicles” from both sides of the polemic. .
There has never been more speculation and investment in the oil markets as exists at this moment in time. Latest data from the Commodity Futures Trading Commission (CFTC) shows a record amount of crude oil futures and options held by large “non-commercial” companies, a category generally thought reflective of hedge funds, commodity pools, index funds, and Exchange Traded Futures, or ETFs.
The bias toward “bets on higher prices” is currently about 280,000 contracts, which represents a skew of about 280-million bbl.
It’s not just speculators jumping on the bandwagon that has brought us to this point. Every market needs seller, and right now, many oil companies, trading firms, and speculators are frightened of selling futures contracts in a market that could explode higher on further violence.
Q. Won’t electric cars catch on and cut into gasoline demand?
A. No, not yet. The cars are too expensive to see widespread application and the physics of how much power can be stored in batteries presents a daunting challenge. I am prepared in any case for such an eventuality. If electric fueling catches on, I have chosen two possible rap names; Shocka-Kahn, or Volt-aire. You can weigh in with your choice of which one is better.
Q. Will consumers cut back as gasoline prices rise?
A. Yes. Some folks who live paycheck to paycheck cut back when prices top $3.00 gal. Others will use less as prices hit various intervals. We began the last recession in December 2007, so we’ve never been through a non-recessionary month where gas prices averaged above $3.25 gal.
If consumers don’t cut back on gas purchases, they’ll cut back elsewhere. A study released by PortiaGroup (economists from several Ivy League universities) looked at OPIS historical data and concluded that rising gas prices are much more relevant to household budgets than a cursory glance at numbers might indicate. In Mississippi, for example, households are seeing fuel expenses that surpass 13% of family income and similar high ratios are viewed in Montana, Arkansas, and South Carolina. The study is available by calling Fred Rozell at 732-730-2568.
Q. I’ve heard someone say that this year’s payroll tax break more than offsets the likely increase in gas prices. Isn’t that true, and doesn’t it mean that Americans can afford to spend more on fuel in 2011?
A. Have you ever been to Staten Island? I suggest you randomly ask someone filling up their tank at say $3.60 gal if they appreciate this year’s payroll tax break. They will offer to give you a ride in the trunk.