Both benchmark crudes have risen about 3 dollars since the previous Saturday report, with Brent at $124.39 per barrel and WTI at $106.70. Gasoline prices have risen at a rapid clip, averaging about 1 cent per day in February. See yesterday's post Americans Respond To Rising Gas Prices.
On Monday February 27 I commented on oil prices in Understanding The Current Oil Market. I don't intend to cover that ground again today, so this post will be brief. Reluctantly, I am raising the alarm level. We're in the red now.
Oil Alarm Level — Red
It is ironic that the President is running around talking about high oil prices when he himself did so much to bring them about by escalating tensions with Iran. I don't see an end to this nonsense anytime soon, which was my chief reason for raising the alarm level. There was a false alarm about a pipeline explosion in Saudi Arabia last week which prompted this quote.
"The market reacted so quickly, which really demonstrated the underlying nervousness that exists in the marketplace," said Dominick Chirichella, an analyst at the Energy Management Institute in New York. "If anything real happens, this thing will jump $15, $20 in a heartbeat."
What is particularly galling about this situation is that 2012 is nothing like 2008. China's economy is shaky, not growing like crazy as it was in 2008. Their oil demand growth is slowing. Michael Pettis, a noted China analyst who I respect, thinks China will only get 3% annual GDP growth for a decade. Taken together, China and India still consume less oil than Europe, but that could change this year or next. The differences between 2008 and 2012 in Europe and the United States are all too obvious. Four years ago one could make a very convincing case for a demand shock which took place against a backdrop of stagnant supply. It's much harder to make that case today. In fact, prices might have increased further if it weren't for the fact that weak demand is holding them in check. High prices further weaken demand of course.
Looking at the Big Picture, it is easy to see that supply disruptions or even threatened supply disruptions loom ever larger in a world which is hitting the geological limits on crude oil production. Years ago when I was writing about oil, mainstream analysts were fond of pinning the blame for stagnant supply on geopolitical factors. But these talking heads were mixing up cause and effect. Who would give a damn about Iran if there was plentiful oil which could be obtained elsewhere? Looking forward, it's always going to be something. Welcome to the 21st century.
Bonus Video — Aaron Task talks about the Strait of Hormuz
I think the appropriate term here is that the system has become "brittle." Any large shock is greatly magnified, and enough of them all at once could bring it down.
Posted by: Bill Hicks | 03/03/2012 at 11:16 AM