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Friday, June 6, 2008

What is With These Oil Prices?

There had been a huge number of comments written about Mike Whitney's article, "The Great Oil Swindle", on debate raged on over whether peak oil was affecting the price of the gooey black stuff, or if the world has adequate supplies of the new gold. It had drawn in a range of commenter from expert, to those wanting to put their 2 cents into the debate.

Here was a comment about the price of oil. "1 bbl of =19.5 gals of refined gas. Today's price of a gallon of gas-$4.00 (rounded US average). So, 1 bbl. yields-$78.00 USD. That bbl took about 6 months to reach the consumer's gas tank and thus was purchased in Nov/Dec [2007] from the producer/distributor for about $60-70 USD." At the time, this commenter was saying a bbl was $121. This week oil hovered around $130 [on 6-6-08 it went to $139], rising from $121 in only several days. That is the cost of crude. "Add $1.75 per gallon to refine (leaving aside shipping costs. which are a few pennies), and 19.5 bbls of oil will price out at roughly $6 [or more] per gallon in six months. Someone (I don't remember who) said that the American economy will collapse at $10 per bbl, which is due about Dec. [2008], at this rate."

In July of 2007, gas prices at the pump were near $4.00 per gallon and the price of a barrel of crude was just under $80. But today, the price at the pump is the same, while the price of a barrel has grown by 50%. What is going on?

Another commenter stated that it took around $50 per barrel to break even when drilling and extracting Canadian tar sands or pumping out crude from deep waters of the Gulf of Mexico. I also read the cost to be $30.00. Whatever the price is to obtain it, it will raise the price at the pump. We all know that the price will not drop, although what was interesting was an article from October 2007, written as a research paper stating that the price per barrel would drop in 2009, and in 2010 to $75.00. Another article I read ( said that WTI (West Texas Intermediate) crude oil price was projected to average $110 per barrel in 2008, and $103 per barrel in 2010! The authors went on to say that the average price of regular grade gas would be $3.52 per gallon in 2008, and the regular grade gasoline's monthly average price would be $3.73 per gallon in June 2008. Well, here we are now and the price we are paying is higher than their projections, but not by much. So why the per barrel cost spread, but the pump price not reflecting the 50% increase? How about speculation? This article said that the world's consumption would be projected to grow by 1.2 million barrels per day in 2008.

In addition to speculation, the value of the dollar has fallen since these studies were written.

A Washington State University study, written in 2007, "2007 Gas Price Study", said that "on July 31, 2007, we hit an all time high of $78 per barrel. In May 2007, a gallon of gas was $3.46 and the refining margin cost was $1.23 or 36% of the total price of gas. By July 2007, that refining margin cost per gallon percentage dropped to 22%. What is going on? Hot weather outages increases refining margin percentages, and doesn't lower them.

Remember, the housing bubble had not broken apart yet, so the Wall Street gamblers were still trying to cash in on mortgage securitized derivative profits before the big hit slammed them. These hedge and private equity fundies had not boarded the commodities speculation speed train like they have now. So, this makes me believe that the reason the barrel of crude is so high today is basically due to these gamblers.

Supply and demand is playing a factor, yet always has been and always will, yet, nevertheless, a barrel of crude still jumped by 50% in only 11 months, while the price at the pump stayed close to within 15 cents throughout this time period, at least here in Pittsburgh, and, it appears, in Washington State, too. World consumption for crude per day was 85 million barrels per day in 2006.  83,607,000 in 2005. In 2004, 82 million barrels per day. In 1996, 71 million per day. In June 1995, world consumption of crude was 56 million barrels per day.

One would think, China and India bought more oil as they expanded and developed over the last 11 months. Now over the last 5 years, China's increase in oil had grown by 920 million barrels per year. Mr. Whitney stated that over the same 5 years, Index speculator's demand for crude oil futures had increased by 848 million barrels. And these same speculators have been holding on to 1.1 billion barrels of crude oil futures. This amount is almost equal to the additional amount China needed per year. No doubt, they are holding long waiting for the price to rise. I expect the same for food commodities prices, too.

Other commenters were arguing that speculation was driving the high price of gas at the pump and not so much a scarcity of the stuff, at this point in time. One person said that some time in 2007, we reached $4 at the pump, but the price per barrel was only $75.00. Yet today, we are seeing a barrel costing over $130, while the price at the pump has not changed that much.

What will happen when more and more countries buy oil in other currencies other than dollars? Already, Vietnam, Venezuela, Kuwait and Iran have made to switch out of dollars. The next wave will likely be Saudi Arabia, U.A.E and Qatar. And there is China and Russia. Once the dollar becomes the currency of the past when trading in oil, we will have fond memories of $4/gallon.

I believe Mike Whitney has his finger on much of the argument by believing that speculation from hedge and private equity funds, and others are driving up the price not only of crude, but of other commodities. There is also a commodities index fund and those investors are gambling on the prices being forced up by these Wall Street gamblers.

What could happen is a new bubble being formed. The Republicans have not shown interest in regulating these gamblers. McCain and Bush like it just the way it is. More for the haves and less for the have nots. No doubt, they feel just fine knowing that hard working Americans have to use up more of their expendable incomes to keep their work and commuter vehicle gas tanks full.

Former Senator Phil Gramm, vice chairman of securities for UBS, and McCain's economic advisor worked hard to deregulate the financial industry and now we have unregulated hedge and private equity "fundies" who have been given unfettered access to gamble Federal Reserve Treasury dollars on commodities. This is affecting the prices worldwide. Not only have these "fundies" been given free reign in the speculation arena, the banks and broker dealer financial institutions have been allowed to join in the fun, too. And they are more than likely doing it with OUR tax dollars through the Federal Reserve's Open Window policy of giving loans at their 2% rock bottom price. As I have said before, these institutions are exchanging garbage debt for usable cash in order to join in on the worldwide speculation gambling game.

Instead of the banks and financial institutions using this cash to refinance underwater home loans, or being told to loan this freshly printed deflating dollar to rebuild America's infrastructure, or industrial sectors, they are using it to make the ultra rich even richer, but instead, creating another economic bubble. This is not benefiting the nation. This is actually a national security risk. This should be Code Red on the Homeland Security danger barometer. But no. The Bush/McCain Republi-con plan is to bring about more wealth to the wealthiest of Americans, as well as foreign investors.

We now have our U.S. Federal Reserve vice chairman Donald L. Kohn wanting to allow Wall Street securities firms permanent access to the Federal Reserve loans. (See  "Bailing Out Wall Street", by Peter Morici, 6-2-08, This hare-brained scheme would allow these banks and financial institutions an ATM card to the Treasury 100% of the time. They would no longer have the Fed as the lender of last resort. It would morph into the lender of first resort. No need to go into the Free Market Place to find investors. The American people would be their lenders. Privatize the profits, but socialize the access and any losses that would incur. Kohn said that in exchange these institutions would be subjected to greater regulation. He expects us to believe this? Give away the store, and then we'll watch the burglars.

The top financial institutions like Citigroup, Morgan Stanley, Lehman Brothers, JP Morgan Chase, and others would find themselves diving into a deep well of cash even though Lehman Brothers might end up underwater, too. The upcoming writedowns of debt that they and others are about to experience is looking to be damaging to their assets. They have booked nearly $400 billion in writedowns and credit losses to date. They have not seen bottom yet. Some are saying there is much more to come. As with housing mortgage losses, and bankruptcies, auto loan defaults, and credit card defaults, as stated by Willem Sels, a credit analyst at Dresdner Kleinwort, there is more to come. (, 6-3-08).

Last week, Meredith Whitney, an Oppenheimer analyst, said "The real harrowing days of the credit crisis are still ahead of us and will prove more widespread in effect than anything yet seen." (Written in Mike Whitney's article of 6-3-08, posted on, "The Remorseless Algebra...")

Mr. Whitney wrote in the same article that the Federal Reserve loans to the banksta gangsta climbed to the highest level on record even as Wall Street investment companies scaled back their borrowing. They averaged $15.95 billion in daily borrowing for the week ending May 28, compared with $13.5 billion for the previous week, and the total was a record. The previous high of $14.4 billion came in the week ending May 14. The Fed said it will conduct three auctions in June, each offering $75 billion in short term cash loans. How sweet it is to be loved by Benny. Scaling back borrowing means record borrowing?

The Case-Shiller home price index showed a slump of 14.1% in the first quarter of this year. The worst since this index began 20 years ago. Credit Suisse predicted that foreclosures will end up close to 6.5 million homeowners over the next few years. 

I bet this will a long, hot summer!


Matt said...

A few articles and summaries below:

Mahmoud Ahmadinejad - “At a time when the growth of consumption is lower than the growth of production and the market is full of oil, prices are rising and this trend is completely fake and imposed”

“It is very clear that visible and invisible hands are controlling prices in a fake way with political and economic aims”

Iran, the world’s fourth-largest oil exporter, has repeatedly said the market is well-supplied with crude and blames rising prices on speculation, a weak U.S. currency and geopolitical factors.

The world is not running out of oil and can continue to produce hydrocarbons for the next 40 years provided restrictions are lifted on where companies can operate, the head of BP said today.

Regardless of how one feels about Ahmadinejad, he has a good point.

Carl and Jerry said...

Matt, Thanks for the comment. We appreciate you taking the time. I do agree that there are "invisible hands" controlling prices, be them speculators, or heads of nations.

One thing to remember is that if we were buying our oil in Euros, that price would be nearly half of what we are paying now due to the weak dollar.

The dollar will continue to plummet, and will likely do so unless the Fed and Hank the- Paulie Paulson keep dropping the interest rates.

Finally, the big oil companies continue to hold somewhere around 600 million acres of leased lands in the United States that they are not actively drilling on.

I guess they like the idea of $140 per barrel price.