Posted on 03/05/2004 8:40:25 PM PST by Indy Pendance
TEQUISQUIAPAN, Mexico, March 5 (UPI) -- A gallon of gasoline in the United States is costing close to 1.80 dollar; a price that would be unimaginably low in Europe, where energy taxes are high, but which for Americans is punishing. Stocks of crude oil and gasoline are unusually low, and the world oil price unusually high, while Venezuela, a major oil supplier, is a political powder keg. In the U.S. presidential election year, gas could prove explosive.
The ever-complex world oil market, prey to myriad technical and political complexities, is driven at heart by simple forces of supply and demand. At present, the balance points to still higher prices for crude oil and the gasoline that is refined from it.
Friday, the price of crude on New York's NYMEX exchange was 36.64 dollars. At this level the price is close to its highest in a year, when nervousness about an impending war in the Gulf last drove prices up. But, for most of last year, oil's forays above 30 dollars per barrel were brief. The sustained rise in the price this year has caught the market by surprise. Buyers of crude oil did not expect U.S. and world economic growth to be so strong. U.S gross domestic product growth went as high as an annualized rate of) 8.2 percent in the third quarter. The U.S. mini boom provoked a revival in the world economy. Oil traders, who had been waiting for the oil price to fall, have found themselves forced to buy in a rising market.
The world crude market has been tight for a year.
"The oil price has not recovered from the interruption in Venezuelan supply last year," says Jim Williams, an expert in oil and head of WTRG economics, a consultancy that studies trends in the oil markets. "Now another interruption in Venezuelan supply would send the oil price to $50 per barrel," says Williams, "with a margin of 10 dollars in either direction."
A year ago two events contributed. The U.S.-led invasion of Iraq caused a suspension of Iraqi supply to the market. And in Venezuela a strike by workers in Petróleos de Venezuela, the state-run oil company, caused that country's production to drop from over 3 million barrels per day to just 600,000.
In the West, the drops in oil supply and the fear that worse would follow should the Iraq war provoke unrest in Saudi Arabia, drove the world oil price up temporarily. But the more lasting impact was to squeeze stocks of both crude oil and gasoline in western countries. Now stocks of crude oil in Organization of Economic Cooperation and Development countries--all the world major's economies--are, according to the EIA, close to the bottom of their five year average. Also unusually low are stocks of gasoline. "With stocks of both crude and gasoline low, you have a problem," says Williams.
Until stocks are replenished, world oil prices and U.S. gasoline prices are unlikely to recede by much. But the replenishment is not near at hand.
According to the Energy Information Administration of the U.S. Department of Energy, the only excess capacity in the world--that is to say, additional capacity that could be fed to the market, if needed--is found in Saudi Arabia, which could produce 1.3 to 1.8 million barrels per day more, United Arab Emirates, which could pump another quarter of a million barrels and Qatar, which has an estimated spare capacity of 100,000 barrels. When world demand is currently around 80 million barrels per day, these are not large amounts. Especially when troubled Venezuela is currently supplying about 1.8 million barrels per day to world markets--the majority of that direct to the United States.
When world oil prices are very high, as they have been in the past six months, "everyone with an oil well pumps as much as he can," in Williams' words. The decision in February by Opec, the cartel that contains most of the world's leading oil exporters, to restrict supply by 1 million barrels per day in April and reduce quota cheating counts for little, in Williams' view. "There's no sign of supply being restricted."
Oil producers must be happy with the current state of affairs. Without needing to squeeze supply, they are reaping high prices, well above the 22 to 28 dollars per barrel that the organization has said for some years is its target range.
But Williams points out that the euro price matters to Arab countries and, because the dollar has plummeted against the euro, that price has not risen much in the past year.
In Williams' view, Opec's strategy has shifted. Its aim now is to manage the West's inventories. If stocks of oil are at the lower end of the historical range a high oil price can be maintained.
Looking ahead, the risk that the oil price, and the pump price of gasoline, will rise is high. Unrest in Venezuela is chronic, with much of the population strongly opposed to President Hugo Chávez, and with the constant possibility that the unrest will again find its focus in PdVSA and Venezuela's oil production. Oil traders are following nervously events in the Andean republic.
Chávez, who last week described U.S. President George W. Bush as an idiot--using a vulgar word it would be rude to translate--is a considerable worry for Bush. The U.S. president would welcome Chávez's demise but any instability that might bring it about could also set records in U.S. gasoline prices that would go down very badly with U.S. voters. Cháves's demise could help to bring about that of Bush in November's election.
There are other risks wrapped up in the current high oil prices. A U.S. economy that has been stimulated by expansionary fiscal and monetary policy has grown despite the negative impact of costly oil. But there are signs even now in data on industrial production that U.S. and world growth are slowing. If that slowdown deepens--as this columnist expects--in the course of 2004, the risks in the oil market will shift suddenly in the other direction.
Oil supply has been stimulated by high prices, demand for it by U.S. economic polices. Opec has had some good years. But its high oil price strategy could rebound in its face if world economic growth falls. In 2005 or 2006 the oil price could easily be plummeting.
Really, the environ-whacko position and laws have done the most to contribute to these high energy prices, especially gasoline. Without new refineries and new oil fields, the limited supply is not going to go down in price. Since we have to rely more and more on oil, natural gas, and coal for generating electricity and not the SAFER, CLEANER nukes the total amount of energy given over to gasoline production is less than it could be.
There's no way on God's Green Earth that a Kerry administration will make it better. He is an environ, and anti-business (unless the business is contributing to the Democrats). People have got to know the truth.
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