Best of the Week
Most Popular
1.London House Prices Bubble, Debt Slavery, Crimea 2.0 - Russia Ukraine Annexation - Nadeem_Walayat
2. Gold And Silver – 2014 Coud Be A Yawner; Be Prepared For A Surprise - Michael_Noonan
3.Sheffield, Rotherham Roma Benefits Plague, Ch5 Documentary Gypsies on Benefits & Proud - Nadeem_Walayat
4.Glaring Q.E. Failure Spotted - Money Velocity Is Falling Rapidly - Jim_Willie_CB
5.Don't Miss the Boat on Big Biotech Catalysts: Keith Markey - Keith Markey
6.Gold Prices 2014: Do What Goldman Does, Not What It Says - David Zeiler
7.Bitcoin Price Strong Appreciation to Be Followed by Declines? - Mike_McAra
8.Gold Preparing to Launch as U.S. Dollar Drops to Key Support - Jason_Hamlin
9.Doctor Doom on the Fiat Money Empire Coming Financial Crisis - Andrew_McKillop
10.The Real Purpose Of QE - It’s Not Employment - Darryl_R_Schoon
Last 72 Hrs
Rome Wasn't Burnt In A Day - 24th Apr 14
When Does Government Policy Become Criminal Behavior? - 24th Apr 14
The Great Recession Grinds On - Measuring Misery around the World - 24th Apr 14
Apple, Facebook Beat Expectations - Stock Markets Long-term Recap - 24th Apr 14
Broad Stock Market Situation on the Remains Tense as Companies Release Quarterly Earnings - 24th Apr 14
How High-Frequency Traders Use Dark Pools to Cheat Investors - 24th Apr 14
Stock Market Bears Wrong Again, Apple to Push Dow to New All time High - 24th Apr 14
Gold Prepared for the Attack of the Short Sellers - 24th Apr 14
Weak U.S. Housing Data Supports Euro - 24th Apr 14
Killing the Maximum-Wage Myth - 23rd Apr 14
U.S. Quarterly Economic Review - Optimism at the Fed - 23rd Apr 14
Why Mohamed El-Erian Left Pimco - Video - 23rd Apr 14
QE Is A Fraud Perpetrated By Made Men - 23rd Apr 14
Gold and Miners Outperform Once Again - 23rd Apr 14
G-20 and the US Tell the Bank of Japan to End Quantitative Easing - 23rd Apr 14
How to Get in the Trading Game and Profit - 23rd Apr 14
Fed Follies, U.S. Housing Market Fiasco - 23rd Apr 14
What Will December 31, 2014 Financial Headlines Look Like? - 23rd Apr 14
Why Gasoline Prices are Surging Again - 22nd Apr 14
Cold War 2.0 - 22nd Apr 14
The JIS – Junk Ideology Syndrome - 22nd Apr 14
How to Avoid Losing All Your Money - 22nd Apr 14
Silver Up, Stocks S&P Down - 22nd Apr 14
U.S. Mainstream Media Propaganda Setting the Stage for War With Pakistan - 22nd Apr 14
U.S. Interest Rates are NOT Rising! - 22nd Apr 14
A Crisis vs. the REAL Crisis: Keep Your Eye on the Debt Ball - 22nd Apr 14
Bitcoin Implications of Lack of Price Action - 22nd Apr 14
Japan - The Twilight Of The Rising Sun - 22nd Apr 14
Is This What a Credit Bubble Looks Like? - 22nd Apr 14
The Dark Side Of The Silver Mining Industry - 21st Apr 14
Strong U.S. Dollar Rally Could Pull Rug From Under Gold and Silver - 21st Apr 14
Silver Feeble Rally Fails to Hold Breakout, Falling Back Towards Support - 21st Apr 14
Stock Market Smart Money – All Out or More to Go? - 21st Apr 14
Fast Rising Pump Prices Counterattack - 21st Apr 14
Extreme Climate Change And Life On This Planet - 21st Apr 14
Gold and Silver Stocks Sitting Tight - 21st Apr 14
Stock Market Minor Correction Imminent - 21st Apr 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

What's Behind the Crude Oil Spike to $112 and Why There's More to Come

Commodities / Crude Oil Apr 22, 2011 - 08:49 AM GMT

By: Money_Morning

Commodities

Best Financial Markets Analysis ArticleKent Moors, Ph.D. writes: Crude oil prices rose for the third straight day yesterday (Thursday) - with more of the same to come.

West Texas Intermediate (WTI) crude for June delivery rose to $111.50 a barrel on the New York Mercantile Exchange, and traded as high as $112.48, the highest intraday price since April 11. Crude prices are up by a full third so far this year.


Brent crude is trading at $123.70 a barrel on the ICE Futures Europe exchange in London.

The latest surge in oil prices is not a result of new geopolitical developments - although they continue to weigh on the market.

Nor is it a result of any short-term inventory problems in either the United States or Western Europe. In fact, available supply of both crude oil and finished products continues to run considerably above five-year averages. American stockpiles are now at multi-year highs.

This spike is our introduction to a very quickly changing oil sector - one in which demand is coming from new quarters, and concerns are increasing over sufficient balance among regions.

The New "Oil Dynamic"
It has been some time since the Organization for Economic Cooperation and Development (OECD) countries - essentially Europe, North America, Australia, Korea, and Japan - have actually controlled this market. Demand now comes from developing, not developed, economies.

This has created a new oil dynamic that is playing an increasingly growing role in crude oil prices.

What occurs on a day-to-day basis in the United States - still the largest end-user market in the world - has a declining impact on price. This affects both crude oil and finished products such as gasoline, diesel, high-end kerosene (jet fuel), and low-sulfur heating oil.

There is an important point to remember from all of this: The global oil market is highly integrated.

Regardless of how much surplus inventory may exist in an individual national economy, prices for gasoline (or diesel or heating oil or jet fuel) are still fundamentally driven by what occurs elsewhere in the world.

Neither "Drill, baby, drill" nor "Fortress America" will have the impact their proponents anticipate. In fact, the idea that domestic crude oil can reduce gasoline prices is fundamentally incorrect.

Domestic crude is considerably more expensive to extract than oil imported from elsewhere. And since the cost of crude oil is the single-largest component in the cost of refining, having the source closer to home does not translate into less-expensive refined products.

Now if this had been a national-security argument, pricing considerations would take a secondary seat.

If we were talking about a national security strategy, the objective is to bring crude oil supplies under control; price is not a consideration.

If Americans were to accept paying more at the pump (and we are talking way more here - well over $5 a gallon, as we will see in a moment) as a necessary cost of weaning ourselves from Middle East sourcing, then the solution would be simple.

Unfortunately, it is the pricing side that captures the attention.

And if we are concerned with the price of oil and gasoline, diesel fuel and other fuels, with the net impact of rising oil prices on the U.S. economic recovery, and the risk that those higher costs pose to U.S. jobs, the American tax base, and the country's industrial infrastructure, then importing from abroad becomes the cheaper option.

The security/pricing tradeoff is both the most all-encompassing and the most politically misused element in the entire energy debate.

Yet it does bring the real issue into focus.

Domestic Crude Oil Production Is Unrealistic
An important rule of thumb holds that each $1 increase in the price of a barrel of crude oil translates, on average, into a 2.5-cent increase at the pump for a gallon of regular gasoline, and an increase of as much as 3.2 cents for a gallon of diesel.

Let me put into perspective what this means for domestic U.S. production.

During the second week of July 2008, when oil prices hit $147.27 a barrel, with gasoline costing an average of more than $4.20 a gallon nationwide (and diesel more than $4.60 per gallon), there were more than 360,000 capped wells in West Texas. And those wells held, in aggregate, millions of barrels of crude oil.

But even with oil at $147.27, it was too expensive to open them up. These are "stripper wells," the source of more than 60% of the crude pumped daily in the U.S. market. Each well provides less than 10 barrels of oil a day, but upwards to 200 barrels of water.

And that disproportionately increases the cost of extraction.

At the time, I estimated it would take a price of $183 a barrel to make these wells profitable enough to allow an oil flow. That $35.73 price difference (between the actual record price of $147.27 and the required $183) would have catapulted gasoline prices to an average of $5.09 and diesel to $5.74 per gallon. And that was almost three years ago.

It is little wonder, then, that the United States is experiencing a rise in imported gasoline and other oil products. It is becoming cheaper to refine them abroad.

This is the real reason we will not see new refineries built in the American market.

The actual barriers to new refineries are not environmental regulations or "NIMBY" (not in my back yard) sentiment. Rather - even forgetting about the billions of dollars in expenses involved - it would take about a decade to bring a new refinery on-line from scratch. Well before that period expires, the more cost-effective approach is simply to import what additional oil product is needed.

So the current spike in oil prices is not an aberration. It is not because of events in Libya, or Syria or Bahrain or Egypt. It results from the built-in pricing problems of the market itself.

This will guarantee higher oil product prices, supported by a number of the other elements we have been discussing over the past 15 months.

A Look Forward
As another presidential election cycle begins, you need to keep this in mind. Political rhetoric aside, the gasoline-pricing issue - and the cost of crude oil - is not a result of Democrats, Republicans, Independents, Vegetarians, Reformed Druids, or any other political party or movement.

This comes from the oil market itself.

We will continue to bounce from crisis to crisis until we recognize this fact - and begin the genuine, difficult, exasperating, long and incredibly expensive process of moving from a crude-based economy to a more balanced energy model.

[Editor's Note: In today's essay, Dr. Kent Moors said that America must ultimately move from a crude-based economy to a more balanced energy model.

On one front, at least, we're already making strides.

Indeed, one little American company is pioneering power conversion solutions for the renewable energy markets. Its newest technology is nothing less than a breakthrough that will finally bring solar energy squarely into the power-generation mix.

But here's the stunner: You can still get shares for less than $4.

Dr. Moors is currently recommending it to all of his Energy Advantage subscribers. To find out more, please click here.]

Source : http://moneymorning.com/2011/04/22/...

Money Morning/The Money Map Report

©2011 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or 72 hours after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2014 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014