Just like everybody else, I'm concerned about high and rising oil prices. I'm particularly concerned about the effect these prices will have on strained household budgets, especially in light of the fact that 77% of Americans live paycheck to paycheck.
This post is the first installment of a biweekly oil report I will publish on Saturdays before the afternoon Remedy du Jour (music and film clips). Each report will feature an alarm level (green, yellow, orange or red). With a barrel of oil going for over $91/barrel, we're not yet in the red zone—
Oil Alarm Level — Orange
Here are some recent posts I recommend you read:
- Peak Oil — Where Do We Stand?
- Quantitative Easing, Oil Prices And Recessions
- Understanding The Oil Markets — 2010 Version
- The Next Oil Price Shock — An Update
I wrote Understanding the Oil Markets on December 13th, so the 2010 version is also the 2011 version, only more so. Right now, the overriding concern is that the price will soon exceed $100/barrel and then keep climbing as it did in 2008. There are those who are eager to stoke our fears, as Lisa Margonelli recently commented on in Forget About $5 Gas: $3 Gas Is Bad Enough—
Today the national retail average for gasoline is $3.07 $3.096 per gallon, which is higher than it's been since 2008. But instead of freaking out about that, the media has been focusing on the possibility of $5 gasoline in 2012, a claim made by former Shell President John Hofmeister. Hofmeister's point (he heads a non-profit called Citizens for Affordable Energy) is that the problem is that we're "essentially frittering at the edges of renewable energy, stifling production in hydrocarbon energy," leading to "blackouts, brownouts, gas lines, rationing."
When Platts printed Mr. Hofmeister's predictions the day after Christmas, he became an instant media sensation. Even Platts claimed to be surprised by the ruckus, since Mr. Hofmeister had predicted the same many times before, and it would imply that the price of crude reaches $180 a barrel, which even the boldest analysts think is too high.
John Hofmeister can be safely ignored on all matters relating to oil—he also thinks we can avoid his bogus $5 gasoline in 2012 prediction if we do more offshore drilling. The problem with all such forecasts is that you never get there. The American and global economies would crash long before we got to $180 oil.
Where are oil prices going? I don't know, at least in the short-term. I'm still waiting for China's economy to implode, but many veteran China watchers have been waiting for that outcome for many years now. However, there are definitely signs that their economic growth—this includes cities nobody lives in and malls nobody shops in—is slowing, and I'm looking for the oil consumption data to reflect that slowdown.
Right now, it seems that the price is respecting an invisible barrier at about $92.50/barrel (the resistance level). All other things being equal, there will be a late winter/spring price bounce. Margonelli says we should worry about $3.25-$3.75 gasoline between now and May. I think she's right, but I don't expect to see $3.25 gasoline until March/April.
Why are we panicking about unlikely $5 gasoline? Perhaps because it's more comfortable to think about something that probably won't happen rather than preparing to be clobbered by $3.25-$3.75 gasoline between now and May. By then, OPIS analyst Tom Kloza estimates we'll be spending $38-$44 billion a month on gasoline. That's about twice as much as we spent on gas in the month of December 2009. I mean, that's about $20 billion more!
This is not going to wallop all families equally. Consider the city of Atlanta, where the average commute length is 39.4 miles each way...
Our economy being what it is, I expect conditions to be very sensitive to $90-$100/barrel oil and $3.50/gallon gasoline. See Jim Hamilton's Worrying About Oil Prices for a discussion of the effects of high prices on the economy.
My prediction? Little change in the oil price between now and the next report. I believe oil will remain below $92.50.
It has been interesting to see what has been happening with inventories in the US. The normal decline in stock at year end occurred. Last weeks report again showed a decline, but that is still data from 2010.
Wednesdays report will be interesting. The transalaska pipeline has been down or partially down for a week now. They will soon have to start shipping crude to west coast refineries if it does not get back to the 650K bbl/day normal rate. The news said they will have to take it all the way back down to complete repairs.
So just this event should produce another negative inventory report next week. A few more declines will bust your $92.50 prediction.
We shall see.
Posted by: Bill Sadler | 01/15/2011 at 11:41 AM