Crude Cracks $130

I am still trying to extract myself from underneath an avalanche of e-mails, but thought I would post just a bit on oil prices, which are again in record territory:

Oil passes $130 for the first time

In the past year, crude oil prices have more than doubled, pushing retail gas prices higher.

The price of a gallon of regular unleaded gasoline hit a record high for the 14th straight day, according to AAA’s Web site.

The nationwide average for a gallon of regular unleaded rose to $3.807, up from $3.80 the previous day and up 19% from year-ago levels.

Global demand has been increasing much faster than supply. In particular, demand for diesel fuel in China, India, the Middle East and South America has made it very difficult for suppliers to keep pace.

The direction of prices has not been a surprise to me, but the speed that they have climbed has been. Last summer, when oil was still bouncing in the $60’s, I said I thought it would crack $100 in 2008. It only missed one trading day by cracking that in 2007, and has been on a tear since fall. Right now prices are about a year ahead of where I had forecast them.

How high will prices go? In the long run, I can’t make a good case for any particular top. They could go much higher. In the short term, I never try to guess the direction. But I am certainly not in the $40 oil camp. Those days are history. The days of $80 oil may even be history, and if that is the case the economy will continue to be in for a rough ride.

26 thoughts on “Crude Cracks $130”

  1. I think the general rise in the price of oil will contain lots of ups and downs. I wouldn’t be surprised to see a drop in prices that fools people into thinking the “bubble” has burst, then to see the price rise even higher. It’s been fairly steady this year though, with only small fluctuations.

    It is scary to see it rise so quickly, and I’m not sure where we are in relation to peak production. I do think we are pre-peak or at worst, on top of the peak. But if that’s true, then imagine what prices will do when production starts to fall.

  2. More buffoonery from the US Senate today: Energy Executives appear before US Judiciary Committee . It is also on CSPAN 3

    Senator Leahy was grilling them on salaries. He picked on John Lowe from ConocoPhillips because Mr. Lowe didn’t know how much he made last year. (He wanted to avoid a perjury trap, so it is better to say you don’t know than answer wrongly.) I would have answered the question this way:

    “Senator, my salary was just about the same as Shaun Chacon, the 9th highest paid player on the Houston Astros.”

    OMG, Charles Grassley, the Senator from Ethanol is going on about how ethanol decreases prices for gasoline.

  3. Hoffmeister from Shell is taking the Senators apart. He just hit batted the “it will take 10 years for new exploration to have an impact” question out of the park.

    Essentially he said that if new American exploration acreage became available that the market would take into account future surplus production. American consumers would benefit immediately from more exploration.

  4. Let Shell loose on shale oil. The Green River deposit dwarfs Saudi Arabia.
    $130 oil? Fueled by speculation. But ugly for Third Worlders, and lower-income First Worlders.
    I hope the United States wrests control of its energy future soon.

  5. Expect above $120 a barrel at least until after the US elections in November. It is important to influence the elections, for certain speculators whose names we must never say out loud.

  6. The days of $80 oil may even be history, and if that is the case the economy will continue to be in for a rough ride.
    I agree $80/bbl may be a fond memory (the good old days), but I don’t think it will cripple the economy. So far the main fallout from high oil prices has been higher gas prices and airline tickets.

    IMHO, foolish FOOD->FUEL schemes have done a lot more damage, worldwide, by leading to higher food prices. King, here is a question for Charles Grassley, the Senator from Ethanol (senator who used too much ethanol?): The American corn harvest is typically of the order of 10 billion bushels per year, or 280 million tons a year. American oil consumption, on the other hand, is about 20 million bbl/d or ~1 trillion tons a year. That means that corn is only 28% of oil by weight, and about 12% by energy content (since oil is more than twice as energy dense as corn). Explain how you thought that 12% could be used to make any difference to the price of oil or gasoline? And do so without a catastrophic effect on the price of corn?

  7. Expect above $120 a barrel at least until after the US elections in November. It is important to influence the elections, for certain speculators whose names we must never say out loud.
    Yeah, yeah. It’s the evil speculators! If only somebody would throw them into the sea! Then Santa Claus and the Tooth Fairy could bring us the cheap oil that we deserve…

  8. Hi RR,

    A but OT but it’s Wednesday and I miss the “TWiP” updates you used to do. Has there not been anything of interest lately, or do you just not have the time to do them these days?

  9. Has there not been anything of interest lately, or do you just not have the time to do them these days?

    It’s been a bit of both. Inventories haven’t been much outside of normal ranges this year, except for gasoline which got really high.

    But more than the time (which I don’t have much of anymore) is the timing. Before I changed jobs, I knew exactly where I would be when the report came out, so I had a routine. Now, I can’t even predict which country I will be in when the report comes out. So my routine got all screwed up. I didn’t even realize it was Wednesday until I saw a headline earlier saying crude inventories fell.

    Cheers, Robert

  10. “Senator Leahy was grilling them on salaries.”

    Add up an arbitrarily large number of executive salaries. Divide the sum by the number of gallons of gasoline sold.

    Talk about re-arranging the deck chairs on the Titanic….

    How much did Howard Stern get for signing on with Sirius? $500 mm?

  11. Interesting story in WSJ about military going to synfuels. One price mentioned was $55 a barrel. The F-T process from coal.
    With Shale and coal, is $130 sustainable? At anything more than $60-$70, I contend forces are set in motion that will bring abut a glut….

  12. Here’s an interesting bit of information: line 39 in the referenced table shows Total World Demand. Note that Q4 2007 (the most recent on record) demand (86.61 million bbl/d) is the highest on record. Ditto for 2007 calendar year (85.35 million bbl/d), with apologies to Benny.

    Also of interest: if you calculate the difference between supply (line 26) and demand (line 39), you’ll see that demand exceeds supply on an annual basis for the first time in 2007 (by 760,000 bbl/d). Interestingly Q1 2007 and Q4 2007 shows roughly the same excess demand (1.13 million bbl/d). Anybody betting against Q1 2008 demand exceeding supply by an even larger number?

    So much for the speculators. It is all supply and demand. Talk about an inconvenient truth…

    Senator Clueless, any comment?

  13. From the hearings:

    “You have to sense what you’re doing to us – we’re on the precipice here, about to fall into recession,” said Sen. Richard Durbin, D-Ill. “Does it trouble any one of you – the costs you’re imposing on families, on small businesses, on truckers?”

  14. Optimist – Interesting find. If you look at 2007 v the earlier years it is clear that the OECD demand is flat or falling while China and India are picking up.

    What is shocking is that OPEC production is down by 400,000 barrels per day and US production up by 160,000 who would have predicted that? Most of the OPEC decline is Venezuela and Nigeria. Interesting that other OPEC nations have tried to pick up market share.

  15. Oil shale would only be a trickle, and coal is already well utilised for electricity gen. If CTL takes off, it will do for coal what ethanol has done for corn prices.

    The idea that any new supply or alternatives will come along to cause oil prices to collapse is frankly ludicrous. The speculators are betting that we need oil and it is peaking. They are right on both counts.

  16. Actually, OPTIMIST, 2008 is looking to have a rather large surplus in supply over demand of about 1m bbl/day — per the last IEA report Q1 stocks actually grew at a rate of 600k b/d which will be growing through the rest of the year. These estimates were before saudi increased pumping by 300k b/d so look for total surplus to be even higher. Yes, it’s true that for the last year we drew stocks but the oeverall draw in 07 was less than that in 06 so by end 2007 stocks were still above those at beginning 2006 levels. I suspect market will want to see stocks build as we move through q2 before any meaningful drop in prices can really start to happen — and with the market now in carry’s all the way out the curve it should hopefully become less of an attractive investment to the index funds. For those who think speculation has nothing to do with it (while in reality the large index funds are flooding the market with long only money — this is the speculation that I think is driving up the market, not the old style speculation that went both long and short) wonder why the goldman report comes out calling fro 140 oil and prices are now $10 higher…is goldman just *that* good at timing this market? I think instead they release a report and institutional investors flock to the market, much more plausible explanaition if you ask me.

  17. I don’t know if it is a sign or what, but two of these cars showed up in the parking lot driven by traders.

    And I am driving the KingofKaty hybrid, which got 34 MPG on the trip home last night!

  18. ROBERT–

    Google ads are improving– from water fuel scams to female attire. your readership will continue its growth. an old man thanks you for the reprieve, though brief, from oil cost.

    fran

  19. “The idea that any new supply or alternatives will come along to cause oil prices to collapse is frankly ludicrous.”

    Agree 100%. There’s likely some short-term speculative froth here, but real solutions are decades away. Prices will continue rising in general until excess is wrung out of global demand. I wish I knew what price that will be, I could make a lot of money off that knowledge.

    We’re stuck with a 15 year-old Isuzu Rodeo that gets 18MPG as our personal vehicle. But it’s paid for, and mainly costs us in gas, oil and tires to run. We just re-ran the numbers at 10,000 miles per year and $5/gal gas. Trading to a 35MPG replacement still doesn’t make $en$e unless the new car costs no more than $3-4K, which I guess means a 7-8 year old vehicle. Nah, easier to wait.

    So all we can do is try to drive less for now. By $10/gal, I’m sure that we’ll make a switch. But it will probably be a 3-4 year old Civic or something similar, not a fancy expensive hybrid.

    So my gut feel is that we level out somewhere between $5-10/gal at the pump over the next couple years. Gas isn’t expensive enough yet to force sufficient changes in consumption patterns.

  20. Most people who don’t live in Utah seem to think it’s a great idea to tear into the Book Cliffs around Green River for oil shale.

    Egads, what an environmental disaster that would be. I hear that commercial interests are already buying up what few water rights exist around Green River to build a nuke plant. I’m not a fan of either, but if I have to choose, it’s easy – build the nuke and leave the Book Cliffs alone.

    If we won’t drill in ANWR where the oil is plentiful, I doubt that the environmental lobbies will allow Utah redrock to be touched. If push comes to shove, my bet is that ANWR goes first. Because it’s further “out there”.

  21. Maybe it’s time for congress to ban internal combustion vehicles. Does anyone think automakers would leave dealer lots empty for long? I’ve got a hunch they’d get damned creative pretty darned fast.

  22. This “wait for a better battery” is a crock of shiite. Electric cars have been around for almost 200 years. They once outsold internal combustion. Cheap Texas crude and Ford’s assembly line put them out of business. The cheap crude days are over,but the assembly line is still dominated by gas powered cars. A gas engine is much more complicated than an electric motor. And much more profitable. Plug-in electrics were on the road in 1916. But,if we’ll just be patient a few more years…..LOL.

  23. That should have read “plug-in hybrids” were on the road in 1916. They even had regenerative braking. Automakers will delay,delay,delay whan it comes to electric cars. They just aren’t as profitable. There oughtta be a law.

  24. For mike c

    I know I haven’t commented here in a while, but although I also miss Robert’s interpretation of This Week In Petroleum, I hope you know that you can always check it out yourself at: http://www.eia.doe.gov/oog/info/twip/twip.asp . It comes out at 1:00 pm Eastern Time every Wednesday, unless a Federal holiday earlier in the week pushes it back to 1:00 pm Thursday (like next week, because of Memorial Day).

    As some of you may remember, I was the principal author of this from its inception to sometime in the fall last year, but I’m now in a new job at EIA, and I’m less involved with TWIP. But it is still an excellent resource, IMHO. 🙂

    Doug MacIntyre

  25. Maybe it’s time for congress to ban internal combustion vehicles. Does anyone think automakers would leave dealer lots empty for long?

    They would sit empty for years as it would take that long to ramp battery manufacturing and such.

    As for batteries, it’s true we don’t need to wait to build slow vehicles with 30 mile range like we had in 1916. We do need better batteries to build cars which can compete with internal combustion on a price-performance basis. You can’t do that with lead-acid, NIMH or current lithium-ion. You can get close with some of the new lithium chemistries, assuming their prices will fall once they hit mass production. I strongly believe we need a national program to subsidize such cars. It’s MUCH cheaper than what we currently spend on oil. But even with a massive program it will still take years.

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