The oil and gas conundrum
Wednesday, 22 February 2012 | 00:00
When it comes to prices of oil and gasoline, the law of supply and demand does not seem to apply.
As I am sure everyone knows by now, crude oil prices are skyrocketing. Since last September alone, the price of a barrel of oil consumed in the United States has soared by a thumping 34%.
As a consequence, prices of such petroleum-based products as heating oil and gasoline have jumped sharply in recent months, with industry sources predicting that gasoline prices may surpass their previous peaks within the next few months — well before the driving season is in full swing.
Not surprisingly, these increases are threatening the nascent recovery just when it appeared to be gathering steam. To many, this is déjà vu all over again.
Two years ago, the recovery slowed because of a combination of Europe’s debt crisis, the waning effects of the previous year’s stimulus and weakness in the housing market.
Last year around this time, the economy got the wind knocked out of it by three unexpected developments: the harsh winter, turmoil in the Middle East and the earthquake and tsunami in Japan. And while housing remained problematic, Europe’s debt problems morphed into a crisis of confidence in the euro.
Now, besides the lingering effects of housing and the euro, the recovery appears to be once again threatened by a jump in oil prices. This is particularly ironic, since supplies are up while demand is down.
On the supply side, there is no shortage of oil. Industry people say there is plenty of oil in storage tanks, on ships waiting to be delivered and in pipelines both here and abroad.
As for demand, usage of heating oil is down because of the extremely mild winter experienced in the northeast quadrant of the U.S. This is the section of the country that uses the most heating oil.
Meanwhile, higher prices and the lingering effects of the recession have sent gasoline use down year-over-year for the past three years. People are driving less, as well as buying more fuel-efficient vehicles.
However, when it comes to household budgets, the rise in gasoline prices has more than offset the drop in usage. Last year, motorists spent $4,000 at the pump, which amounted to 8% of household incomes — twice as much as the 4% they spent in 2002. It figures to go even higher this year.
Like prices of many other commodities, including stocks, the price of oil many times reflects traders’ expectations of future events more than what is happening in the present.
And when they look ahead, traders are apparently pricing in a complete cessation of supplies from Iran, not to mention other stoppages because of a possible blockade of the Strait of Hormuz.
As for gasoline, traders expect tight supplies later this year because of anticipated refinery closings and the need to produce gasoline that meets air-pollution requirements.
Since oil is such an important commodity, used not only for heat and power but to generate electricity and as a feedstock in the production of plastics and clothing, any combination of high prices and reduced supplies could produce a crude awakening, when it comes to the sustainability of the economic recovery.
Source: Market Watch