Oil Trends Blog

OIL INDUSTRY STATUS

In a recent article by the Miami Herald entitled “U.S. trade deficit hits all-time high”, it was mentioned that the chief culprit in forcing the deficit to this level was global oil prices. According to the article the U.S foreign oil bill soared to a record $251.6 billion, up 39.4% from 2004. It also indicated a significant part of this increase was due to loss of Gulf Coast production following Hurricane Katrina. The trade deficit is indeed a significant and complicated problem for our country, particularly considering the high cost of the war in Iraq and the reconstruction costs incurred as a result of the hurricanes. However, we should not be confused by the stories regarding the supply and demand issues on oil confronting our domestic needs. Table 1 below indicates that, despite disruptions in crude supply and spot outages of gasoline and distillate in various areas of the Gulf Coast, there were ample supplies available. In fact, inventories of both crude oil and products actually increased over the last year to-date. This information was obtained from “This Week in Petroleum”, published by the Department of Energy.

As you can see crude oil stocks have been higher than last years average range. Despite increases in inventory (stock) levels, prices of both crude oil and products continued to increase as shown in the Table 2 below.

Table 2

Despite crude oil inventory increases from last year of 26.4 million barrels, prices increased by about $19.00/barrel. In fact from March of 2004 prices have jumped from about $35.00/barrel to over $65.00/barrel in March of 2006. Realistically, one must say that U.S. supply and demand statistics have not strictly followed the principles of basic economics. In fact, I would suggest that the hurricanes, while causing disruptions in some areas, were not responsible for the significant increase in prices. The real driver of price increases results from the fact that crude oil and petroleum products are commodities that are traded daily on the New York Mercantile Exchange (NYMEX). These commodities can be bought and sold in substantial quantities based on the whims of a few large investors. As a result, prices can fluctuate significantly within one trading period and have nothing to do with the supply or demand of the physical barrel. The “rumor mill” provides the somewhat unrealistic and emotional reasons for the changes and these are the reasons given by the news media for fluctuations in price. As an example, one reason given for the strong price footing at the NYMEX beginning the week of 2/6/06 was the concern over Iran’s stand on uranium enrichment, as if this could possibly have an immediate effect on oil prices. NYMEX emotion, combined with OPEC control of significant oil reserves are what control petroleum prices in this county, not hurricanes or suggested lack of refining capacity as we are so often told. There are many problems to be solved with regard to the cost of energy supplies, but the oil industry has done an admirable job of handling domestic supply and demand issues, particularly during disruptions, such as, Katrina.