Gary_in_Orygun
04-30-2008, 08:54 AM
Here's an interesting perspective from an automotive / oil writer from Texas. It's in two installments and very interesting.
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VIEWPOINT April 1, 2008, 3:41PM EST
There Is No Gas Shortage
But Washington, Wall Street, and ethanol and oil and gas companies want you to think there is, says automotive expert Ed Wallace
by Ed Wallace
"They see speculation in the market, I see decline in global inventories. I don't think this is a big surprise, that we've had a jump in price when there has been a decrease in crude inventories."—Energy Secretary Sam Bodman, Bloomberg News, Mar. 5, 2008
"It should be obvious to you all that the [gasoline] demand is outstripping supply, which causes prices to go up." — President George W. Bush, Associated Press, Mar. 5, 2008
One wonders if verifiable facts ever get in the way of this administration's statements on issues that are critical to the average American's wellbeing. After all, last time I checked, when politicians are elected to public office, or appointed, as is Energy Secretary Samuel W. Bodman, they must take an oath to the American people before assuming their new positions. How can they forget a sacred oath so quickly? Were they daydreaming when they took it, so it never meant anything to begin with? Maybe it's just another promise you have to make to get into office: When you're securely incumbent you can ignore even solemn oaths you took.
Obviously, the two quotes that led this article came from discussions concerning the current high price for oil on the futures market. Bodman appears to be protecting the speculators in oil, as opposed to looking after the interests of all Americans. President Bush, apparently, has never talked to the Energy Dept.'s Energy Information Agency to see whether gasoline demand is actually up. More troubling, the writer of that particular Associated Press article obviously didn't look up the EIA's numbers to verify the President's assertions. They weren't accurate.
1. There Is No Shortage
Gasoline reserves on hand are at the highest levels since the early 1990s, which is remarkable considering the nation's refineries have been cutting back on the production of gasoline because their margins have declined. In fact, average gasoline reserves on hand have risen since this past October, while oil reserves in this country have gone up virtually every week this year—and only fog in the Houston Ship Channel that kept oil tankers from unloading their crude one week kept it from being every week.
In the same Bloomberg article that quotes from Bodman's CNBC appearance on Mar. 4, he also said that it was thanks to ethanol that the gasoline problem isn't even worse. He then added that the fact that making ethanol is forcing up prices of other farm commodities, including hog and chicken feed, is "nowhere near as important as trying to relieve pressure on [gasoline] supplies."
Of course, there is no pressure on gasoline supplies in this country as of today, but Bodman's statement must have made eyes roll among the executives at Pilgrim's Pride PPC; the Pittsburg, (Tex.) poultry producer announced 1,100 layoffs on Mar. 13, closing one processing plant and 6 of their 13 distribution centers because their company's outlay for chicken feed went up $600 million last fiscal year and was on track to increase by another $700 million this year.
Here's the scorecard, in case you missed it. There's no shortage of gasoline or oil in the U.S. today, and we have near-record reserves on hand. Meanwhile the Congressional mandate for ethanol has jacked up the price of chicken feed for Pilgrim's Pride, which is the U.S.'s largest processor of chickens and turkeys—by $1.3 billion. And that's for just one company processing chicken. This is what passes for acceptable to our Energy Secretary?
2. Demand Is DOWN, Yet Prices Are UP
Just so we can all get on the same page, here are the verifiable facts on oil supplies, production, and gasoline demand.
In January of this year, the U.S. used 4% less petroleum than we did a year ago. (Oil demand was down 3.2% in February.) Furthermore, demand has been falling slowly since July of last year. Ronald Bailey of Reason Online has pointed out that worldwide production of oil has risen 2.5% in the first quarter, while worldwide demand has grown by only 2%. Production is expected to increase by 3.3% in the second quarter, and by as much as 4.1% by the third quarter. The net result is that the U.S. daily buffer for oil production against demand, which was a paltry 1.5 million barrels as recently as 2005, is now up to 3 million barrels in excess capacity today.
So what is going on here? Why would our Energy Secretary say there's a supply and demand problem when none exists? Why would he say that speculators have little or nothing to do with the incredibly high price of oil and gasoline, when it's clear they do? President Bush—a former oilman—gives the ever-growing demand for gasoline as the primary reason prices are so high, yet that notion can be dispelled with one minute of research. That's the problem with rhetoric; it rarely matches the facts.
3. Speculation is Up, and the Dollar Is Down
On the same day the President and our Energy Secretary made those foolish comments, no less an authority than ExxonMobil (XOM) Chief Executive Officer Rex Tillerson was quoted by Marketwatch as saying, "The record run in oil prices is related more to speculation and a weakening dollar than supply and demand in the market." He added, "In terms of fundamentals, fear of supply reliability is overblown."
As for the speculators, in 2000 approximately $9 billion was invested in oil futures, while today that number has gone up to $250 billion. Now, if any publicly traded company had an additional $241 billion put into its stock in the same period, its stock would rise out of sight too—even if the company was not worth anywhere near that amount of market capitalization.
Moving on to the weak U.S. dollar as a primary cause for skyrocketing oil prices—there is "some" truth in that statement. But consider this: The dollar has depreciated 30% against the world's currencies since 2002, while the price of oil has gone up 500%. So is it the weak dollar that has caused a 500% increase in the price of oil, or is it the extra $241 billion worth of speculation? You can make the call on that one.
Possibly just to ensure oil prices don't respond to real-world market conditions, Goldman Sachs (GS) forecast on Mar. 7 that turbulence in the oil market could cause oil to spike as high as $200 a barrel. This flies in the face of all known information—but then again, Goldman Sachs is the world's biggest trader of energy derivatives, and its Goldman Sachs Commodities Index is a widely watched barometer of energy and commodities prices.
What Is Washington Thinking?
Rounding out the list of experts discussing our oil and gasoline situation is Bill Klesse, head of San Antonio (Tex.) Valero Energy (VLO). He spoke in San Diego a week after those comments from Goldman Sachs, the President, and Secretary Bodman. Believe it or not, Klesse said poor margins may cause Valero to sell one-third of its refinery operations; he stated that poor margins in recent months had caused planned refinery expansions—which would have produced 500,000 more barrels per day—to be canceled. Moreover, according to a report from Reuters on Mar. 11, 2008, Klesse recently released the information that gasoline production has been curtailed in response to slowing demand.
Imagine that: Refiners cut gasoline production, yet gasoline reserves have grown to their largest since late 1992. So much for "surging demand."
Klesse also called for the government to start imposing a tariff on imported gasoline to protect U.S. refiners' profits. Protectionism? As famed economist John Kenneth Galbraith correctly said, "In America, the only respectable form of socialism is socialism for the rich."
Which takes us back to the original question: Why is Washington doing everything it can to convince us there is a shortage when there isn't one? After all, the only people they're protecting are those heavily invested in oil futures—and that's to the detriment of all other Americans.
We're Paying for What?
When it became undeniable that poor decision-making by company executives had put a respected 85-year-old U.S. institution in financial peril, why did the Federal Reserve rush in to save investment bank Bear Stearns (BSC)? Of course, we need to restore confidence in our financial institutions, but why protect the personal assets of those who were responsible for the mess? Both the corporation's officers and its board members should contribute their personal assets toward saving the bank they put in the ditch—the bank all of us are going to pay to bail out.
Instead, the Bush administration is protecting those responsible for creating yet another speculative bubble in oil futures, and is protecting investors in the ethanol industry—much to the detriment of food-processing companies such as Pilgrim's Pride. And the net result of all this is that the prices of crude and gasoline rise ever higher thanks to a "shortage" that does not exist, while food costs are soaring thanks in part to the ethanol mandate.
The Federal Reserve lowers interest rates, but the cost of mortgages goes up six weeks in a row—and last month Bank of America (BAC) credit-card holders started being charged more than 24% interest on new purchases.
This is what they call "Republican Prosperity?" Ronald Reagan was both right and wrong when he said, "Government is not the solution, government is the problem." And government is still the problem. Instead of a fair and open market they gave us a free-for-all marketplace with no regulations at all, which lately these "bubble boys" have sent south for all of us.
One would guess that Washington missed the obvious: Protect all U.S. consumers and you're also protecting business expansion.
--------------------------------------------------------------
VIEWPOINT April 23, 2008, 2:21PM EST
There is No Gas Shortage, Part 2
Columnist Ed Wallace argues that nothing in the real world justifies oil's current pricing—except the push for higher profits
by Ed Wallace
"Gasoline inventories are higher than the historical average at this time of the year, and gasoline fundamentals are actually weakening in the U.S., so there is really no need to worry about supply being too tight." — Purvin & Gertz Oil Analyst Victor Shum; Associated Press, Mar. 10, 2008.
"The current high oil prices are inflated by as much as 100%. The price surge is a result of excessive speculation." — Oppenheimer Oil Analyst Fadel Gheit; Congressional Testimony as reported by CNN, Dec. 11, 2007.
"The [oil] fundamentals are no problem. They are the same as they were when oil was selling for $60 a barrel, which is in itself quite a unique phenomenon." — Jeroen van der Veer, chief executive officer, Royal Dutch Shell; Washington Post, Apr. 11, 2008.
On Tuesday, Apr. 1, my column discussing the impact speculators are having on the price of oil (BusinessWeek.com, 4/1/08) was published on BusinessWeek.com. Since then, we've watched oil contract prices continue to rise, now setting an all-time historical record even when factored against inflation. In spite of the controversy my article stirred up—it generated more than 800 comments, more than 430,000 page views, and was dug at Digg.com almost 4,000 times—there was very little new or original in it; I simply compiled numerous articles and quotes from other sources to validate the claim that things aren't always what they seem—in the oil patch or at the gas pump.
More amusing was the fact that, the day after that column ran, the weekly oil report came out from the Energy Information Administration, which showed that we had put another 7.4 million barrels of oil into our reserves. And to validate my point in that column—that there is no connection between price, demand, and the supply of oil and gas—oil prices leaped almost $4 a barrel on that day. And the news kept right on coming.
THE NEW OIL REALITY: PRICES WILL ALWAYS GO UP
On Apr. 7, Reuters Online Service reported that oil had gone up another $3 a barrel, but near the end of that article came this line: "Ships along the northern end of the Houston Ship Channel, which feeds eight refineries in Houston and Texas City, were stopped by dense fog on Monday." As could have been predicted, when the second week's oil report came out from the EIA two days later, crude stocks had fallen by 3.2 million barrels. The result of Gulf Coast fog holding up oil deliveries was that on the release of the second oil report, oil prices again rose by $2.37.
This is the new oil paradigm. No matter what happens, it is used to justify the commodities market's contention that oil prices just aren't high enough: In one week we add 7.4 million barrels of oil to stock in reserve and yet the price goes up almost $4 a barrel. Then the very next week our reserves fall because of fog, and the price goes up another $2.37. But the only people who still claim to be stunned by what's happening in oil are the analysts quoted by the media that cover the industry.
Seven days after the fog report ran, Reuters reported that the EIA was forecasting gasoline demand to be down in the U.S. this summer for the first time since 1991. They mentioned, as I had in that previous column, that gasoline inventories on hand were at the highest levels in 15 years.
On Apr. 14, Automotive News ran an article showing that gasoline reserves on hand going into this year's summer driving season will be at the highest levels since 1999. In between those two stories, on Apr. 10, AP Online discussed the record prices for gasoline and diesel—but also pointed out, "Oil prices were pressured [lower] Thursday by data from tanker-tracking firm Oil Movements showing that OPEC oil shipments rose last week."
Five days later British Prime Minister Gordon Brown and President George W. Bush jointly called for OPEC to further open their oil spigots. Apparently they already had.
SOMEBODY, PULL THE HAND BRAKE!
The point of the original article was that there is currently no shortage of gasoline in the U.S.—even if gas demand were normal—and by everyone's agreement, demand is falling and has been for most of this year. I would take small issue with the article in Automotive News, because the official reserves of gasoline on hand on Apr. 4 totaled 221,268,000 barrels, and you would have to go back to the same week in April of 1993 to find a higher number (228,289,000). Likewise, the amount of oil on hand sat at 316,016,000 on that date, and that was higher than it was during the same week in 2004, 2003, 2001, and 2000.
Of course, anyone discussing oil is going to get hit with the 'China Factor.' That's certainly understandable, since most articles discussing crude will bring up China's surging demand. However last year China imported 3.2 million barrels of oil per day, or something less than half of their total oil demand. It is now being estimated that China will use 7.9 million barrels of oil per day in the coming year, but that is their total oil use, imports included. (By contrast, the U.S. currently imports between 12.2 million and 13.6 million barrels per week.) In any case, the International Energy Agency is forecasting U.S. demand for crude will fall by 2%. Assuming the import component of China's oil use remains the same, the two nations' numbers cancel each other out.
If you take the "fear factor" out of the oil market, all that's left is the hard numbers—and nothing in the real world justifies oil's current pricing. In fact, on Apr. 11, a Washington Post article on the current problems with the price of oil quoted Jeroen van der Veer, chief executive officer of Royal Dutch Shell (RDSA), estimating that the new flow of investment monies into oil rose from $450 million per week at the first of the year to $3.4 billion per week by mid-March. Once again, you've got the head of a major oil company stating that speculation—not market fundamentals—is driving the price of oil.
WHAT'S BEHIND THE AIRLINES' DEMISE?
In the first column I discussed how all U.S. refiners are not making the margins they've become accustomed to on gasoline at the moment; to blame is the high cost of oil combined with lackluster demand for gasoline. (However, by continuing to cut back on production of gasoline, refiners have improved their positions for "crack spreads"—the industry term for the difference between the price of crude oil and petroleum products extracted from it—since Apr. 1—a point not lost on motorists everywhere.) Much in the same way, ethanol isn't really profitable right now either, because the price of corn has skyrocketed to over $6 a bushel. But none of this was an attempt to explain the problems with distillates, which are heavy fuels, heating oil, aviation fuel, and diesel.
Middle distillates, such as aviation fuel, have played a big part in four airlines' having declared bankruptcy over the last 30 days, while Delta (DAL) and Northwest (NWA) have declared their intent to merge their operations.
But distillates also are killing the trucking industry in the U.S.; the price of diesel has shot up over $4 a gallon throughout the country because the stockpiles of distillates are running well below the five-year average. And yet, according to Antoine Halff with New York brokerage Newedge USA, in the first week of April the U.S. exported more distillates than it imported. Combine that with the fact that we were running our refineries at much slower rates to burn off some of our gasoline reserves, in order to push up the price of gas, and you have a mix that has hurt our ability to improve the distillate reserves. Additionally, import of distillates into the U.S. is down 38% this year, mostly because there is little surplus of these fuels in Europe.
Distillates refined in the Middle East are typically directed to Asia; governments there don't require that those fuels meet the new U.S. standards for ultra-low sulfur content.
THERE IS NO SHORTAGE OF GASOLINE
It gets worse. According to Tom Knight, an energy trader with TAC Energy in Texarkana, Tex., the U.S. is about tapped out on its ability to make ultra-low-sulfur diesel. In a nutshell, one of the big problems with diesel is that refineries have cut back their runs on gasoline to enhance their profits, while at the same time we've hit a brick wall in making the new EPA-required formulation for diesel from the materials available. The same holds true for aviation fuel.
So here we go again. There's no shortage of gasoline. Nor is there a shortage of oil on the world market. There is a shortage of distillates such as diesel and aviation fuel, but that is partly because refineries are trying to short gasoline supplies to improve their "pitiful" crack margins. And all of this plays out against an economic slowdown that, in any other place or time, would be forcing the prices of these commodities down rapidly.
Don't even get me started on how the ethanol mandate is helping to do the exact same thing to food prices.
Ed Wallace holds a Gerald R. Loeb Award for business journalism, bestowed by the Anderson School of Business at UCLA. His column heads the Sunday Drive section of the Fort Worth Star-Telegram, and he is a member of the American Historical Society. The automotive expert for KDFW Fox 4 in Dallas, Wallace hosts the top-rated talk show Wheels, Saturdays from 8 a.m. to 1 p.m. on 570 KLIF AM in Dallas.
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VIEWPOINT April 1, 2008, 3:41PM EST
There Is No Gas Shortage
But Washington, Wall Street, and ethanol and oil and gas companies want you to think there is, says automotive expert Ed Wallace
by Ed Wallace
"They see speculation in the market, I see decline in global inventories. I don't think this is a big surprise, that we've had a jump in price when there has been a decrease in crude inventories."—Energy Secretary Sam Bodman, Bloomberg News, Mar. 5, 2008
"It should be obvious to you all that the [gasoline] demand is outstripping supply, which causes prices to go up." — President George W. Bush, Associated Press, Mar. 5, 2008
One wonders if verifiable facts ever get in the way of this administration's statements on issues that are critical to the average American's wellbeing. After all, last time I checked, when politicians are elected to public office, or appointed, as is Energy Secretary Samuel W. Bodman, they must take an oath to the American people before assuming their new positions. How can they forget a sacred oath so quickly? Were they daydreaming when they took it, so it never meant anything to begin with? Maybe it's just another promise you have to make to get into office: When you're securely incumbent you can ignore even solemn oaths you took.
Obviously, the two quotes that led this article came from discussions concerning the current high price for oil on the futures market. Bodman appears to be protecting the speculators in oil, as opposed to looking after the interests of all Americans. President Bush, apparently, has never talked to the Energy Dept.'s Energy Information Agency to see whether gasoline demand is actually up. More troubling, the writer of that particular Associated Press article obviously didn't look up the EIA's numbers to verify the President's assertions. They weren't accurate.
1. There Is No Shortage
Gasoline reserves on hand are at the highest levels since the early 1990s, which is remarkable considering the nation's refineries have been cutting back on the production of gasoline because their margins have declined. In fact, average gasoline reserves on hand have risen since this past October, while oil reserves in this country have gone up virtually every week this year—and only fog in the Houston Ship Channel that kept oil tankers from unloading their crude one week kept it from being every week.
In the same Bloomberg article that quotes from Bodman's CNBC appearance on Mar. 4, he also said that it was thanks to ethanol that the gasoline problem isn't even worse. He then added that the fact that making ethanol is forcing up prices of other farm commodities, including hog and chicken feed, is "nowhere near as important as trying to relieve pressure on [gasoline] supplies."
Of course, there is no pressure on gasoline supplies in this country as of today, but Bodman's statement must have made eyes roll among the executives at Pilgrim's Pride PPC; the Pittsburg, (Tex.) poultry producer announced 1,100 layoffs on Mar. 13, closing one processing plant and 6 of their 13 distribution centers because their company's outlay for chicken feed went up $600 million last fiscal year and was on track to increase by another $700 million this year.
Here's the scorecard, in case you missed it. There's no shortage of gasoline or oil in the U.S. today, and we have near-record reserves on hand. Meanwhile the Congressional mandate for ethanol has jacked up the price of chicken feed for Pilgrim's Pride, which is the U.S.'s largest processor of chickens and turkeys—by $1.3 billion. And that's for just one company processing chicken. This is what passes for acceptable to our Energy Secretary?
2. Demand Is DOWN, Yet Prices Are UP
Just so we can all get on the same page, here are the verifiable facts on oil supplies, production, and gasoline demand.
In January of this year, the U.S. used 4% less petroleum than we did a year ago. (Oil demand was down 3.2% in February.) Furthermore, demand has been falling slowly since July of last year. Ronald Bailey of Reason Online has pointed out that worldwide production of oil has risen 2.5% in the first quarter, while worldwide demand has grown by only 2%. Production is expected to increase by 3.3% in the second quarter, and by as much as 4.1% by the third quarter. The net result is that the U.S. daily buffer for oil production against demand, which was a paltry 1.5 million barrels as recently as 2005, is now up to 3 million barrels in excess capacity today.
So what is going on here? Why would our Energy Secretary say there's a supply and demand problem when none exists? Why would he say that speculators have little or nothing to do with the incredibly high price of oil and gasoline, when it's clear they do? President Bush—a former oilman—gives the ever-growing demand for gasoline as the primary reason prices are so high, yet that notion can be dispelled with one minute of research. That's the problem with rhetoric; it rarely matches the facts.
3. Speculation is Up, and the Dollar Is Down
On the same day the President and our Energy Secretary made those foolish comments, no less an authority than ExxonMobil (XOM) Chief Executive Officer Rex Tillerson was quoted by Marketwatch as saying, "The record run in oil prices is related more to speculation and a weakening dollar than supply and demand in the market." He added, "In terms of fundamentals, fear of supply reliability is overblown."
As for the speculators, in 2000 approximately $9 billion was invested in oil futures, while today that number has gone up to $250 billion. Now, if any publicly traded company had an additional $241 billion put into its stock in the same period, its stock would rise out of sight too—even if the company was not worth anywhere near that amount of market capitalization.
Moving on to the weak U.S. dollar as a primary cause for skyrocketing oil prices—there is "some" truth in that statement. But consider this: The dollar has depreciated 30% against the world's currencies since 2002, while the price of oil has gone up 500%. So is it the weak dollar that has caused a 500% increase in the price of oil, or is it the extra $241 billion worth of speculation? You can make the call on that one.
Possibly just to ensure oil prices don't respond to real-world market conditions, Goldman Sachs (GS) forecast on Mar. 7 that turbulence in the oil market could cause oil to spike as high as $200 a barrel. This flies in the face of all known information—but then again, Goldman Sachs is the world's biggest trader of energy derivatives, and its Goldman Sachs Commodities Index is a widely watched barometer of energy and commodities prices.
What Is Washington Thinking?
Rounding out the list of experts discussing our oil and gasoline situation is Bill Klesse, head of San Antonio (Tex.) Valero Energy (VLO). He spoke in San Diego a week after those comments from Goldman Sachs, the President, and Secretary Bodman. Believe it or not, Klesse said poor margins may cause Valero to sell one-third of its refinery operations; he stated that poor margins in recent months had caused planned refinery expansions—which would have produced 500,000 more barrels per day—to be canceled. Moreover, according to a report from Reuters on Mar. 11, 2008, Klesse recently released the information that gasoline production has been curtailed in response to slowing demand.
Imagine that: Refiners cut gasoline production, yet gasoline reserves have grown to their largest since late 1992. So much for "surging demand."
Klesse also called for the government to start imposing a tariff on imported gasoline to protect U.S. refiners' profits. Protectionism? As famed economist John Kenneth Galbraith correctly said, "In America, the only respectable form of socialism is socialism for the rich."
Which takes us back to the original question: Why is Washington doing everything it can to convince us there is a shortage when there isn't one? After all, the only people they're protecting are those heavily invested in oil futures—and that's to the detriment of all other Americans.
We're Paying for What?
When it became undeniable that poor decision-making by company executives had put a respected 85-year-old U.S. institution in financial peril, why did the Federal Reserve rush in to save investment bank Bear Stearns (BSC)? Of course, we need to restore confidence in our financial institutions, but why protect the personal assets of those who were responsible for the mess? Both the corporation's officers and its board members should contribute their personal assets toward saving the bank they put in the ditch—the bank all of us are going to pay to bail out.
Instead, the Bush administration is protecting those responsible for creating yet another speculative bubble in oil futures, and is protecting investors in the ethanol industry—much to the detriment of food-processing companies such as Pilgrim's Pride. And the net result of all this is that the prices of crude and gasoline rise ever higher thanks to a "shortage" that does not exist, while food costs are soaring thanks in part to the ethanol mandate.
The Federal Reserve lowers interest rates, but the cost of mortgages goes up six weeks in a row—and last month Bank of America (BAC) credit-card holders started being charged more than 24% interest on new purchases.
This is what they call "Republican Prosperity?" Ronald Reagan was both right and wrong when he said, "Government is not the solution, government is the problem." And government is still the problem. Instead of a fair and open market they gave us a free-for-all marketplace with no regulations at all, which lately these "bubble boys" have sent south for all of us.
One would guess that Washington missed the obvious: Protect all U.S. consumers and you're also protecting business expansion.
--------------------------------------------------------------
VIEWPOINT April 23, 2008, 2:21PM EST
There is No Gas Shortage, Part 2
Columnist Ed Wallace argues that nothing in the real world justifies oil's current pricing—except the push for higher profits
by Ed Wallace
"Gasoline inventories are higher than the historical average at this time of the year, and gasoline fundamentals are actually weakening in the U.S., so there is really no need to worry about supply being too tight." — Purvin & Gertz Oil Analyst Victor Shum; Associated Press, Mar. 10, 2008.
"The current high oil prices are inflated by as much as 100%. The price surge is a result of excessive speculation." — Oppenheimer Oil Analyst Fadel Gheit; Congressional Testimony as reported by CNN, Dec. 11, 2007.
"The [oil] fundamentals are no problem. They are the same as they were when oil was selling for $60 a barrel, which is in itself quite a unique phenomenon." — Jeroen van der Veer, chief executive officer, Royal Dutch Shell; Washington Post, Apr. 11, 2008.
On Tuesday, Apr. 1, my column discussing the impact speculators are having on the price of oil (BusinessWeek.com, 4/1/08) was published on BusinessWeek.com. Since then, we've watched oil contract prices continue to rise, now setting an all-time historical record even when factored against inflation. In spite of the controversy my article stirred up—it generated more than 800 comments, more than 430,000 page views, and was dug at Digg.com almost 4,000 times—there was very little new or original in it; I simply compiled numerous articles and quotes from other sources to validate the claim that things aren't always what they seem—in the oil patch or at the gas pump.
More amusing was the fact that, the day after that column ran, the weekly oil report came out from the Energy Information Administration, which showed that we had put another 7.4 million barrels of oil into our reserves. And to validate my point in that column—that there is no connection between price, demand, and the supply of oil and gas—oil prices leaped almost $4 a barrel on that day. And the news kept right on coming.
THE NEW OIL REALITY: PRICES WILL ALWAYS GO UP
On Apr. 7, Reuters Online Service reported that oil had gone up another $3 a barrel, but near the end of that article came this line: "Ships along the northern end of the Houston Ship Channel, which feeds eight refineries in Houston and Texas City, were stopped by dense fog on Monday." As could have been predicted, when the second week's oil report came out from the EIA two days later, crude stocks had fallen by 3.2 million barrels. The result of Gulf Coast fog holding up oil deliveries was that on the release of the second oil report, oil prices again rose by $2.37.
This is the new oil paradigm. No matter what happens, it is used to justify the commodities market's contention that oil prices just aren't high enough: In one week we add 7.4 million barrels of oil to stock in reserve and yet the price goes up almost $4 a barrel. Then the very next week our reserves fall because of fog, and the price goes up another $2.37. But the only people who still claim to be stunned by what's happening in oil are the analysts quoted by the media that cover the industry.
Seven days after the fog report ran, Reuters reported that the EIA was forecasting gasoline demand to be down in the U.S. this summer for the first time since 1991. They mentioned, as I had in that previous column, that gasoline inventories on hand were at the highest levels in 15 years.
On Apr. 14, Automotive News ran an article showing that gasoline reserves on hand going into this year's summer driving season will be at the highest levels since 1999. In between those two stories, on Apr. 10, AP Online discussed the record prices for gasoline and diesel—but also pointed out, "Oil prices were pressured [lower] Thursday by data from tanker-tracking firm Oil Movements showing that OPEC oil shipments rose last week."
Five days later British Prime Minister Gordon Brown and President George W. Bush jointly called for OPEC to further open their oil spigots. Apparently they already had.
SOMEBODY, PULL THE HAND BRAKE!
The point of the original article was that there is currently no shortage of gasoline in the U.S.—even if gas demand were normal—and by everyone's agreement, demand is falling and has been for most of this year. I would take small issue with the article in Automotive News, because the official reserves of gasoline on hand on Apr. 4 totaled 221,268,000 barrels, and you would have to go back to the same week in April of 1993 to find a higher number (228,289,000). Likewise, the amount of oil on hand sat at 316,016,000 on that date, and that was higher than it was during the same week in 2004, 2003, 2001, and 2000.
Of course, anyone discussing oil is going to get hit with the 'China Factor.' That's certainly understandable, since most articles discussing crude will bring up China's surging demand. However last year China imported 3.2 million barrels of oil per day, or something less than half of their total oil demand. It is now being estimated that China will use 7.9 million barrels of oil per day in the coming year, but that is their total oil use, imports included. (By contrast, the U.S. currently imports between 12.2 million and 13.6 million barrels per week.) In any case, the International Energy Agency is forecasting U.S. demand for crude will fall by 2%. Assuming the import component of China's oil use remains the same, the two nations' numbers cancel each other out.
If you take the "fear factor" out of the oil market, all that's left is the hard numbers—and nothing in the real world justifies oil's current pricing. In fact, on Apr. 11, a Washington Post article on the current problems with the price of oil quoted Jeroen van der Veer, chief executive officer of Royal Dutch Shell (RDSA), estimating that the new flow of investment monies into oil rose from $450 million per week at the first of the year to $3.4 billion per week by mid-March. Once again, you've got the head of a major oil company stating that speculation—not market fundamentals—is driving the price of oil.
WHAT'S BEHIND THE AIRLINES' DEMISE?
In the first column I discussed how all U.S. refiners are not making the margins they've become accustomed to on gasoline at the moment; to blame is the high cost of oil combined with lackluster demand for gasoline. (However, by continuing to cut back on production of gasoline, refiners have improved their positions for "crack spreads"—the industry term for the difference between the price of crude oil and petroleum products extracted from it—since Apr. 1—a point not lost on motorists everywhere.) Much in the same way, ethanol isn't really profitable right now either, because the price of corn has skyrocketed to over $6 a bushel. But none of this was an attempt to explain the problems with distillates, which are heavy fuels, heating oil, aviation fuel, and diesel.
Middle distillates, such as aviation fuel, have played a big part in four airlines' having declared bankruptcy over the last 30 days, while Delta (DAL) and Northwest (NWA) have declared their intent to merge their operations.
But distillates also are killing the trucking industry in the U.S.; the price of diesel has shot up over $4 a gallon throughout the country because the stockpiles of distillates are running well below the five-year average. And yet, according to Antoine Halff with New York brokerage Newedge USA, in the first week of April the U.S. exported more distillates than it imported. Combine that with the fact that we were running our refineries at much slower rates to burn off some of our gasoline reserves, in order to push up the price of gas, and you have a mix that has hurt our ability to improve the distillate reserves. Additionally, import of distillates into the U.S. is down 38% this year, mostly because there is little surplus of these fuels in Europe.
Distillates refined in the Middle East are typically directed to Asia; governments there don't require that those fuels meet the new U.S. standards for ultra-low sulfur content.
THERE IS NO SHORTAGE OF GASOLINE
It gets worse. According to Tom Knight, an energy trader with TAC Energy in Texarkana, Tex., the U.S. is about tapped out on its ability to make ultra-low-sulfur diesel. In a nutshell, one of the big problems with diesel is that refineries have cut back their runs on gasoline to enhance their profits, while at the same time we've hit a brick wall in making the new EPA-required formulation for diesel from the materials available. The same holds true for aviation fuel.
So here we go again. There's no shortage of gasoline. Nor is there a shortage of oil on the world market. There is a shortage of distillates such as diesel and aviation fuel, but that is partly because refineries are trying to short gasoline supplies to improve their "pitiful" crack margins. And all of this plays out against an economic slowdown that, in any other place or time, would be forcing the prices of these commodities down rapidly.
Don't even get me started on how the ethanol mandate is helping to do the exact same thing to food prices.
Ed Wallace holds a Gerald R. Loeb Award for business journalism, bestowed by the Anderson School of Business at UCLA. His column heads the Sunday Drive section of the Fort Worth Star-Telegram, and he is a member of the American Historical Society. The automotive expert for KDFW Fox 4 in Dallas, Wallace hosts the top-rated talk show Wheels, Saturdays from 8 a.m. to 1 p.m. on 570 KLIF AM in Dallas.