Oil's tipping point: Where is it?

With oil less than a buck away from $120 a barrel, analysts are growing weary at trying to anticipate the tipping point that will bring prices down.

Some say a six-score price could prompt developed countries to pressure the Organization of the Petroleum Exporting Countries to increase production whether or not the cartel sees a need to do so.

Others say it's folly to predict a tipping point until the weak dollar stabilizes and strengthens.

Either way, analysts say, it's reaching the point where something's got to give.

"I'm hopeful that we are in the grand finale of this 2008 event," said Tom Kloza, chief oil analyst at the Oil Price Information Service in Wall, N.J.

The side effect of high crude prices most visible to consumers, the price at the gasoline pump, also is setting records — and for the first time this week it surpassed its all-time inflation-adjusted high.

Oil crossed that threshold several months ago. The federal government says the average U.S. price per gallon of gasoline hit $3.508 on Monday, nearly a dime higher than the March 1981 high of $3.41 in today's dollars ($1.42 before adjustment for inflation.)

That continued push also prompted analysts to speculate that oil's run-up is reaching its last rally.

Kloza said attempting to identify the tipping point is "pretty much an exercise in abstract thought."

Earlier this year, though, he compared $100 oil to the pre-dot-com bust Nasdaq stock exchange rally in 1999 and 2000, though he wasn't clear on whether $100 oil represented Nasdaq at 4,000 or 5,000.

"It is now clear that it represented the former, and not the latter, which represented the last throes of the bubble," Kloza said. "I hope $120 a barrel is the equivalent of the Nasdaq 5,000, which would put us in the last inning."

Crude for May delivery came within a dime of $120 a barrel Tuesday before closing at a record $119.37 a barrel on the New York Mercantile Exchange. The push came amid the dollar's fall to another low against the euro, which makes oil a cheaper buy for foreign investors.

Demand in China, India and the Middle East remains strong, while U.S. demand is flat or falling, awash in worries about a recession fueled by the credit and housing crisis and negative jobs data.

Geopolitical factors that raised concerns about supply in recent days include militant attacks on Royal Dutch Shell's oil operations in Nigeria that shut down 169,000 barrels a day of production; a pirate attack on an oil tanker near Yemen; and revelations that oil production in Russia fell in January and February.

Dollar called driving force However, Addison Armstrong, director of market research for TFS Energy in Stamford, Conn., said the weak-and-weaker dollar is driving the ramp-up.

The Federal Reserve has slashed U.S. interest rates to aid efforts to stave off a recession.

The European Central Bank hasn't cut interest rates and hinted this week that it may raise rates to address inflation — which could widen the gap between the euro and the dollar.

"Until the dollar really stabilizes and turns, it's foolish to try to call a top in this market," he said. "This crude rally is all about the dollar."

Cushion of subsidies Also, consumers in emerging economies like China and India where demand is strong haven't felt the pressure of high prices prevalent in the U.S. because their governments subsidize their gasoline costs, Armstrong noted.

"I think the tipping point really has to come when we see more significant demand destruction here in the U.S.," he said.

"The longer and deeper the recession in the U.S. is, there is a chance that begins to impact China's economy and India's economy and some others where we get a lot of imports. In a slowdown, we wouldn't be buying as much, and that could impact what is happening overseas."

For now, however, demand in emerging economies is more than offsetting slower demand in the U.S. and other developed countries, said Brian Hicks, co-manager of the U.S. Global Investors Resource Fund in San Antonio.

An OPEC increase? And Hicks said $120 a barrel could prompt developed countries to pressure OPEC to "at least think about or consider" increasing production.

Top policymakers in Saudi Arabia, the world's biggest oil producer, have said recently the kingdom sees no need to increase output anytime soon. But International Energy Agency Executive Director Nobuo Tanaka said in a speech Sunday that OPEC should help boost oil inventories because prices are too high.

Hicks noted that OPEC has less spare capacity than in the past — now less than 2 million barrels a day — but there's room to talk about upping output with oil hitting its current level.

"That's probably at the point where you start to see global leaders maybe get involved," Hicks said. "It's becoming more and more of a headwind to the economy."

Kloza said $120 oil doesn't change his prediction that the average U.S. price for gasoline will range from $3.50 to $3.75 a gallon with exceptions in some areas, such as California.

He has said $4 per gallon gasoline isn't reasonable given the sluggish economy and underlying fundamentals of supply and demand.

“24 April 2008 - Crude oil fell for a second day in New York after the dollar rose against the euro, reducing the appeal of commodities to investors, and a government report yesterday showed U.S. stockpiles increased more than expected...

Crude oil contracts have become attractive to investors seeking to offset a 14 percent decline in the dollar against the euro in the past year. When the dollar strengthens, oil loses some of its appeal as an inflation hedge.”

Summary of Weekly Petroleum Data for the Week Ending April 18, 2008

U.S. crude oil refinery inputs averaged 14.8 million barrels per day during the week ending April 18, up 591,000 barrels per day from the previous week’s average.

Refineries operated at 85.6 percent of their operable capacity last week.

Gasoline production moved slightly higher compared to the previous week, averaging nearly 8.9 million barrels per day. Distillate fuel production rose last week, averaging 4.1 million barrels per day.

U.S. crude oil imports averaged 10.0 million barrels per day last week, up nearly 1.2 million barrels per day from the previous week.

Over the last four weeks, crude oil imports have averaged more than 9.5 million barrels per day, 711 thousand barrels per day below the same four-week period last year.

Total motor gasoline imports (including both finished gasoline and gasoline blending components) last week averaged 1.0 million barrels per day. Distillate fuel
imports averaged 261,000 barrels per day last week.

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 2.4 million barrels from the previous week.

At 316.1 million barrels, U.S. crude oil inventories are in the lower half of the average range for this time of year.

Total motor gasoline inventories decreased by 3.2 million barrels last week, and are at the upper limit of the average range.

Both finished gasoline inventories and gasoline blending components inventories decreased last week.

Distillate fuel inventories decreased by 1.4 million barrels, and are in the lower half of the average range for this time of year.

Propane/propylene inventories increased by 2.2 million barrels last week.

Total commercial petroleum inventories increased by 0.7 million barrels last week, and are in the lower half of the average range for this time of year.

Total products supplied over the last four-week period has averaged 20.7 million barrels per day, up by 0.8 percent compared to the similar period last year.

Over the last four weeks, motor gasoline demand has averaged nearly 9.3 million barrels per day, up by 0.9 percent from the same period last year.

Distillate fuel demand has averaged nearly 4.3 million barrels per day over the last four weeks, up 0.5 percent from the same period last year.

Jet fuel demand is 1.3 percent lower over the last four weeks compared to the same four-week period last year.

Oh, man...

Thomas Sowell wrote about the dangers of something he called "The Bar of Reason."

It addressed an interesting qwirk of human nature, the tendency to overestimate our own intelligence....and underestimate the need for intellectual context...knowledge.

In Sowell's example, someone holds an opinion not only wrong, but ignorant...and when called on it, says, "I'm a bright guy...explain it to me."

Unfortunately, his example needed about two year's of schooling before he could even qualify to take part in a basic discussion.

I'm not, repeat not, trying to be mean...but ignorance of economics is endemic in the US today, and it's dangerous when combined with the arrogance of entitlement.

Not just the sense of entitlement to cheap gasoline, mind you...but the sense that because you have the right to an opinion, you have the right to have it be taken seriously.

You obviously know little, if anything, about economics...and there's no other tool to understand markets, other than economics.

Primitives in bearskins with spears had no framework, no context for understanding what happened around them. They invented one...it involved mysterious, malevolent spirits.

Latter-day primitives don't use the same vocabulary, but the meaning is similar...now the evil spirits are big business, liberals, etc...and conspiracies are everywhere.

Your notion, simply put, doesn't even stand up to the most casual analysis. Yet, because you obviously know so little about economics, there's no way to explain it to you...and no way for you to know when someone is conning you.

You obviously don't understand what a commodity market is...and you don't know how little the actions of one relatively small producer can move price. You don't understand that in most cases, any individual producer will harm profits, not increase them, by following your "rationale."

You obviously don't understand that "markets are the messenger."

What's more, you seem to have an "intellectual hard on" toward business (there are more polished ways to describe it, but your...I won't even call it an opinion...it's more of an attitude, makes it fit well.)

It's scary, because you're probably better informed, relatively speaking, and you vote. Yet, you're not just wrong...you're obviously ignorant.

Wrong can be addressed in a discussion. Ignorance requires schooling...and a certain humility on the part of the schooled.

I've always wanted to ask these questions...

Would you want to have surgery from someone who wasn't a doctor, but had really strong opinions about surgery?

Do you believe politicians who pass laws to regulate business should have some knowledge of economics?

Do you believe that voters, who bear ultimate responsibility in our system, should have some knowledge of economics?

Do you believe that all opinions have the same validity?

Please humor me...

I might be able to engage in discourse with you except that nothing in your stream of non-specific statements makes any attempt at making an actual point. The ad hominem style is unflattering to one who apparently fancies themselves an intellectual. Is a “business hard on” a good thing or a bad?

Of course, I said there would be no point for me in discourse with you about economics, since I said you were ignorant, not just wrong.

This was shown by your suggested strategy for maximizing profit...by shutting down production.

I actually mentioned a "hard on toward business," which is something different. It's an attitude more than an opinion, a willingness to believe the worst about business because, well, it's business. And in your case, it's borne of ignorance.

This was shown by your assertion that companies were shutting down refineries for market manipulation, not because of an industry practice called 'turnaround.' You dismiss some maintenance as perhaps necessary, but you obviously don't know it's an industry wide practice. You obviously don't know that refineries have been running at higher than normal utilization because of Katrina, and that they're finally catching up on maintenance.

You're obviously also ignorant of the role that low sulphur diesel has played in needed refinery upgrades.

It hasn't occurred to you that from a profit standpoint, it makes the most sense to do turnaround when the refining margin is lowest...it costs the company the least, and the market will miss the production the least.

You assumed the worst when even rudimentary knowledge of the industry and of economics would have given you another answer.

In your ignorance, you assume and assert the worst about business. That's what I wanted to understand. I actually had specific statements I wanted your response to...

Would you want to have surgery from someone who wasn't a doctor, but had really strong opinions about surgery?

Do you believe politicians who pass laws to regulate business should have some knowledge of economics?

Do you believe that voters, who bear ultimate responsibility in our system, should have some knowledge of economics?

Do you believe that all opinions have the same validity?

In case you still don't understand the point...if someone were a plumber, listening to opinions and statements about how to do plumbing by someone with no actual knowledge would be pointless, and at some point actually painful.

Your post scaled that peak, and now stands triumphantly astride.

Isn't at least some knowledge a prerequisite for opining?

Sigh. I didn’t expect your latest response would be just more of the same churlish vapor. I had hoped for more than pedestrian insults from the world’s preeminent internet economist (six-foot three and 245 pounds of rippling muscle, no doubt), but, alas I’m left wanting.

You drew a conclusion about my stance toward business without adequate facts. That was your first error due to an inadequate assessment of what was said and quite possibly unsaid. But lacking further facts, you reached a startlingly inaccurate conclusion. That’s not what I would expect from the world’s preeminent internet economist.

Your next error was when you stated, “You obviously don't understand what a commodity market is...and you don't know how little the actions of one relatively small producer can move price. You don't understand that in most cases, any individual producer will harm profits, not increase them, by following your "rationale."”

I’m sure you’ll tell me that your skills in understanding the commodities markets have enabled you to make quite the substantial profit for a life fit for a king. Or maybe just for an internet millionaire. The markets for widgets, wheat and OJ work more efficiently than an energy market restricted by government control of resources (our government and foreign). In a controlled market, like that for energy, manipulations by an entity can affect the pricing. The OPEC cartel was designed to do just that. You rejected that slowing refinery deliveries will constrict supplies thus pressuring prices higher. Those who refuse to learn from the past are condemned to repeat it. The California energy crisis of 2001 – 2001 was caused by Enron’s behavior in exactly the same manner of restricting supply. In fact, Key Lay (of Enron) said, "In the final analysis, it doesn't matter what you crazy people in California do, because I got smart guys who can always figure out how to make money." The California regulators agreed that the market can be manipulated, because it was manipulated. Sometimes reality just shoots the book stuff all to hell, doesn’t it? Please note, when you make a sweeping declarative statement, a single contradictory item will invalidate your entire thesis. I won’t call you ignorant, although that’s what it is. I’ll just chalk it up to a lack of focus by the world’s preeminent internet economist.

Now, on to your penile juvenilities. One might say that your inability to find any fault in a business’ motives demonstrates a childish innocence on your part. Businesses have a requirement to maximize profits. Sometimes they proceed in an unsavory fashion. But for your blinders you would see that. How else to explain Bhopal? I’d attribute your failing in this area to just another case of too many books, not enough reality.

Finally, the silly questions, designed to demonstrate what? Your first mistake here is equating a soft-science like economics with a hard science like medicine. Really, you take your status as world’s preeminent internet economist much too seriously. I will deal with your interrogatories seriatim.

Would you want to have surgery from someone who wasn't a doctor, but had really strong opinions about surgery?
Of course not, that would be stupid. There is an agreed-upon procedure for removing an appendix. But anybody who thinks economists agree can ask Paul Krugman what he thinks of Ludwig Von Mises.

Do you believe politicians who pass laws to regulate business should have some knowledge of economics?
Of course not. There is no requirement in the Constitution for anything of the sort. Anybody who would agree with a stupid argument like that would undoubtedly agree that only those who have served in the military can take a position on defense concerns.

Do you believe that voters, who bear ultimate responsibility in our system, should have some knowledge of economics?
Again, another untenable, preposterous position. The right to vote requires no requisite skills. Folks who cannot even speak English may vote. A person holding to such a position would place the country in grave danger if their wish were to ever be enacted. At that time, it would be a government test that would assess proficiency in economics. That government might not be on your side, my friend.

Do you believe that all opinions have the same validity?
Of course, all opinions are valid, even yours. Opinions are based on one’s life learning (and other’s book learning). People can only know what they can experience and learn. If you disagree, is it your opinion that if you personally are not adequately familiar with farm subsidies that you should not be able to opine about the wastefulness of the expenditure (if that were to be your position)?

Your conclusion fell back into the trap of equating a hard art like plumbing with the soft-science of economics. If your pipes are clogged, you need a plumber. If your economy is stalling, the last thing you need is four three-handed economists with eleven solutions.

You are probably, normally a very nice person. But for your brusqueness, I might even find you so. But what I have experienced is the remarkable vastness of the World Wide Web. If not for FreeRepublic, I might never have had the opportunity for discourse with the world’s preeminent internet economist.

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