Saturday Oil Report -- February 18, 2012

Oil prices have risen to a 9-month high "driven by simmering geopolitical tensions over key crude producer Iran and optimism the Greek debt crisis can be resolved." Brent is going for $121.35 a barrel, and the Nymex WTI price stands at $103.24. That's about a 7 dollar rise in the Brent price and a 4 dollar rise in the WTI price since my previous Saturday report. Greek debt isn't going anywhere, and the threat that Israel will bomb Iran is just that—a threat. Speculative money is driving the price. I see no reason to change the alarm level.

Oil Alarm Level — Orange

As I noted in yesterday's post, fears about a surge in gasoline prices this spring have mounted in recent weeks. According to the Daily Fuel Gauge, regular unleaded is going for $3.538 per gallon on average across the nation. That's a 16 cent rise in the past month and a 38 cent rise year-over-year. In an election year, a potential economy-stifling rise in fuel costs puts the Fear of God into Obama's people, who think such a rise might damage "the recovery" and thus their re-election chances.

Amid predictions that the economy's recovery will continue at a moderate pace, White House officials are keeping an increasingly wary eye on oil prices, worried that an election-year spike in the cost of gasoline could dampen consumer confidence and quash President Barack Obama's recent economic and political gains.

Obama advisers point to oil's $23 per-barrel increase in the first half of 2011 over 2010 prices as the factor that eroded purchasing power and slowed growth last year. At the time, unemployment remained stuck at 9.1 percent for three months, and by August Obama's approval rating stood at a low of 38 percent.

In an annual report issued Friday, Obama's economic advisers drew attention to improved economic data and a range of private sector forecasts that place unemployment at between 8.0 and 8.6 percent for the end of 2012. And they note that economic growth so far has been nearly as fast as the recoveries after the 1991 and 2001 recessions.

But gasoline prices — right now at a national average of $3.53 per gallon and rising — are higher than they were at this time last year. Amid continued turmoil in the Middle East and building tensions with Iran, investors are betting that supplies will remain tight in the months ahead and Obama administration officials worry that any disruption in the flow of oil from Iran will result in a rise in global prices.

Obama has been using the threat of higher oil prices as justification for extending a 2 percentage point payroll tax cut through the end of 2012, thus avoiding a $40 reduction in the average worker's paycheck.

"When gas prices are on the rise again — because as the economy strengthens, global demand for oil increases, and if we start seeing significant increases in gas prices, losing that $40 could not come at a worse time," Obama said this week.

All of the parts about "the recovery" are political nonsense, but higher prices for oil and gasoline are all too real to Americans already stretched very thin. Unless a miracle occurs, there is a tough road ahead in 2012 from the fuel costs perspective.

I also alluded in yesterday's post to Citigroup's report claiming that peak oil is now a dead issue. One might think that with our peak oil concerns allayed we needn't worry about gasoline prices now or ever again. I took the liberty of looking at that report. I saw that the first author listed was Seth Kleinman, who Peter Orszag quoted in his Bloomberg editorial asserting that fears about peak oil were baseless. See my recent post Peter Orszag Destroys The Peak Oil Myth. Orszag, who used to be Obama's OMB director, now works for Citigroup. It all comes together!

The Citi report mostly confines its production analysis to shale reservoirs in the United States, so Mr. Kleinman is apparently dismissive of the fact that peak oil is a global phenomenon. Moreover, the report never distinguishes between crude oil and natural gas liquids, lumping these fossil fuel hydrocarbons under the general terms oil or liquids. This is one of the first things an experienced analyst looks for in such reports. Thus we get graphs like this one—

And this one—

If you are impressed by about 18 billion barrels of liquids BOE (barrels of oil equivalent) discovered (globally) in 2010, it seems that you are very easily impressed. Of course, I should remind you that gas liquids (or condensates) are not normally refined into the transportation fuels we use (gasoline, diesel and jet fuel). Crude oil is refined into these products, and that's one reason among many (e.g. it's higher energy density) why it is important to humankind. But if you're at Citigroup, you can make money trading either, so it makes no difference to them. I suppose I could be irritated with a world in which bankers tell me my business, but I'm too old, cynical and detached to care.

What will the oil price be in two weeks? It could be higher if this Iran nonsense continues. I also expect gasoline prices to keep climbing. Welcome to 2012.

Bonus Video — How many times does anti-carbon crusader "Crazy" Bill McKibben mention coal, as opposed to oil, in the video below?

 

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Comments

[John D]

I can already see the pre-election pandering. Cut the national gas tax? Use the Strategic Petroleum reserve? Subsidize SUV sales? The possibilities are endless.

[Bill Hicks]

There is an interesting twist to the increasing gas prices story here in the Northeast and Mid-Atlantic with the recent refinery shutdowns in Pennsylvania and New Jersey. Gas prices are galloping upwards in these parts well ahead of the rest of the country.

Here in Virginia, the spread between prices in NOVA and downstate has widened to as much as 70 cents according to Gas Buddy, whereas 20-30 cents is more typical. Definitely a development worth keeping an eye on.

[Charles Monroe]

@Bill what ya need is a solar powered tank truck and you could arb. the prx between no. and so. VA.

[Compound F]

Dave, you're indispensable. I know you think, "why am I wasting my time?" but you're not. totally not.

[Wanooski]

Gas prices were falling here in the northwest over the last few weeks, I have been waiting with great trepidation for the other shoe to drop. It was hovering just under 4 bucks a gallon for several months and slowly started to creep down to around 3.50 over the last couple weeks, I think it was likely speculative bullshit prompted by that hardcore propaganda campaign about America's return to "energy independence".

[Dave Cohen]

@Compound F

Re: not wasting my time

Thanks. I need to hear that once and awhile.

-- Dave

[teri schooley]

Dave,
A tiny bit of the increase in prices in the US is that Congress allowed the ethanol subsidy to expire on Jan. 1. Dealers were given a 4.5 cent per gallon discount on gas that had 10% ethanol added to it. The discount is gone as of the beginning of the year, resulting in an immediate 5 cent increase. Now, the "adding ethanol" thing was retarded - adding ethanol reduces gas mileage by roughly 3 miles per gallon in most makes of cars and wreaks havoc to food production, etc. I have not seen that any of the big oil companies have stopped adding ethanol; they just aren't getting the financial break for doing so. No doubt Exxon loves diluting their product with ethanol, since it makes people have to fill up more often.
In any case, it looks like you still get ethanol in your gas, it just costs the same as gas without it now.
I have never figured out how they worked the numbers so that if you buy 93-octane (or whatever) that has been diluted with ethanol by 10% it can still be called 93-octane. Can corn ethanol be refined into differing grades?
Maybe that's a stupid question? For sure it's irrelevant - they can probably find a way to put cow pee in the gas and legally call it "high test" these days.

[Brian Hansen]

Dave - I see you've progressed from peak oil to peak civilization! I'm impressed. Drop me a line if you get a chance - I'd enjoy hearing how you're doing. Impressive sites with a lot of thoughtful insights (as usual)