Piqued by Oil

The price of petroleum's slacking

With all of that pumping and fracking

Maintaining supply

At a level so high,

While demand, at the same time, is lacking. 

One would think, from the low price of crude,
That the future has been misconstrued,
But there's finite supply
In the ground, which is why
When it's emptied, it can't be renewed.

The price of oil continues to fall as, in the face of weak demand, producers from the Arabian peninsula to the tar sands of North Dakota keep pumping it out.   Like the protagonists in the famous Prisoners' Dilemma, exploration & production companies know that they would collectively benefit by slowing the pace of production, but individually they are motivated to cover as much of their costs as possible. 

In the short run, this development benefits consumers around the world, especially where the cost of driving is a major factor. At the same time, the oil exploration & production companies and their lenders are reeling from prices far below those they assumed when budgeting for the costs of extraction. 

In such times it is helpful to take the long view, which is that we are headed toward an eventual fall from the "net energy cliff," in the words of oil analyst Chris Nelder. This is the point at which it takes so much energy to extract the petroleum that it's no longer worth it. Notwithstanding today's bargain prices, that point may be closer than you think. 

Bringing Down the Price of Oil

When there's negative news from abroad
And the US recovery's flawed,
It precipitates shocks
To oil and stocks
In Chicago, New York & Riyadh.

"Be careful what you wish for; you just might get it." Everybody wants cheaper oil, but it often comes with a cloud over it, bringing lower stock prices along for the ride. On Thursday, the Dow Jones industrials fell 1.96% as negative economic news from Europe and China combined with the announcement of a manufacturing slowdown in the Philadelphia Fed district to cast a pall over US growth prospects. US crude oil prices responded to the weak data by falling to $78.20 a barrel, a new low for the year.

Stimulus at the Pump

A fall in the fuel price enhances
The state of the nation's finances,
And the drag it removes
Most likely improves
The incumbent's electoral chances.

Most Americans have likely noticed a fall in the price of gasoline over the last month. The US Energy Information Administration reports that the price at the pump now averages $3.79 a gallon, down 3.8% from the 2012 peak of $3.94 on April 2. Some of the causes of this happy development include: softer demand due to the weaker economy, a drop-off in perceived tensions with Iran, additional refinery capacity and improvement in crude oil distribution logistics. As the incumbent's political fortunes seem to rise and fall inversely with the price of oil, one may now expect joy and consternation respectively in the Obama and Romney camps. Though, aside from the conduct of Iranian relations, the White House has little impact on short-term petroleum price movements, they may nevertheless reap some political benefit as the price of gasoline backs away from the feared $4-a-gallon threshold.

A Gulf in Understanding

Said a man in the Strait of Hormuz:
"The price of the oil we use
More quickly reacts
To the threat of attacks
Than the efforts of drill platform crews."

Upon his return from a relatively unplugged vacation in the hills of eastern Quebec, Dr. Goose was struck by the gulf in perception between some US Republican politicians, who attribute recently higher oil and gasoline prices to the policies of President Obama regarding pipelines and offshore drilling, and petroleum analysts, who tend to cite disruptions in the existing supply in such places as the Persian Gulf. A reasonable interpretation would be that the President's actions regarding oil exploration are of little short-term impact, but his actions regarding global security and stability are critical.

A Crude Iranian Conflict

If an outbreak of Persian hostility
Brings petroleum price volatility,
The economy's cooling
From trouble in fueling
The engine of upward mobility.

Tensions with Iran over its nuclear program have introduced a new round of uncertainty into global strategic affairs, but one thing is definite: if Iranian supply is taken off the market, rising oil prices would impinge on almost every aspect of the US economy. Higher gasoline prices would cause consumers to cut back on discretionary spending, as most have a limited ability to cut back on driving. Manufacturers would be hurt both from higher delivery costs as well as higher prices for plastics and other petroleum-based materials. Even many service industries maintain fleets of vehicles and would feel the effects of a Persian Gulf conflict. The one bright spot at this point is that the prospect of $4.50 gasoline, as in 2008, appears as yet remote.

Overheard at FedEx

"A drop in the pricing of oil
Should sweeten the fruit of our toil,
But since shipping has slowed
In the air and the road,
The fruit of our toil may spoil."

When should shippers not rejoice in the falling cost of fuel? When it indicates a slowing economy, according to the Wall Street Journal's Kelly Evans. Her Ahead of the Tape column points out that lower oil prices have coincided with weakness in the price of $FDX and the S&P 500 generally. Although cheaper fuel is clearly a benefit when looked at in isolation, it may be correlated with global economic activity, as is the shipping business.

A Refined American Export

The GDP targets we've missed of late
Makes Americans' fuel use desist of late,
But with fuel usage surging
In markets emerging,
We ship more petroleum distillate.

The Wall Street Journal recently reported that booming US exports of gasoline and other refined petroleum products would soon make America a net fuel exporter for the first time in 62 years. Though still the world's leading importer of crude oil (that's right - we're still dependent on "foreign oil"), the US' huge and growing refining capacity feeds the demand from growth markets such as Mexico, Brazil and Singapore. Even moribund Europe are "PIGS" for Yankee petrol. Of course, there is a dark side to this good news: the net export balance is helped by our slow economy, which has reduced US fuel consumption.
Graphs courtesy of The Wall Street Journal.

Overheard at American Airlines

"The market immutably sets
The fares and the fuel in our jets,
But a bankruptcy filing
May turn back the dial in
Our benefits, pensions and debts."

AMR Corp has filed for Chapter 11 bankruptcy protection in an effort to bring its cost structure into line with that of the airline industry. The parent of American Airlines is the last of the big "legacy" carriers to restructure its balance sheet and compensation costs in court. Mindful of its proud, 91-year history, American had long avoided a judicial reorganization, but in an environment in which fares are driven by the lowest-cost competitor, the Fort Worth-based carrier's position became untenable.

Unrefined Reversal

On the global commodity bourses,
Crude oil is subject to forces
Like the gasoline price,
Which, when high, may suffice
That the market puts carts before horses.  

A sudden, 8.6% plunge in the price of crude oil to $99.80 a barrel yesterday originated with a surprising source: the high price of US gasoline.  Fears of an imminent "double dip" into recession have been fed by gas prices approaching $4/gallon.  Oil, which - though the main ingredient in gasoline - is sensitive to economic cycles, was evidently poised for a break to the downside.  All that was needed was a surprisingly bearish announcement, and the market got two: European Central Bank President Jean-Claude Trichet implied no imminent hike in euro interest rates, which strengthened the dollar; and new jobless claims were higher than expected, which weakened the US growth outlook.

Anyone But China

The fervently flung accusation
That commodities' rampant inflation
Is the fault of Bernank's
May be gentler on Yanks
Than a less US-based explanation.    

Federal Reserve Chairman Ben S. Bernanke appeared before a Senate committee yesterday, once again facing questions on the Fed's role in rising prices for food and fuel.  Since these commodities comprise a global market in which prices are set by international supply and demand, one may wonder whether the blame directed at quantitative easing willfully ignores the  the "£800 million panda in the room."  Most knowledgeable observers agree that Chinese demand is a more important driver of commodity prices than US money supply.

Crude Commodities

When politics don't go as planned,
Commodities get out of hand,
As markets pay heed
To the fear and the greed,
Instead of supply and demand.    

The gyrations in the price of oil that have accompanied the uprising in Libya - a country with only 2% of global oil reserves - once again highlight the fact that markets are often more focused on the fear of adverse consequences (and the greed for what scarcity could do to prices) than actual changes in supply.

Does the Oil Cleanup Stimulate the Economy?

"All's not lost in the Gulf," said the pol;
"The cleanup makes jobs - that's the goal."
"But imagine instead,"
The economist said,
"If those jobs played a more gainful role."

"In recession, we wait for green shoots
To bring jobs to the idle grass roots;
So the cleanup campaign,"
Said the pol, "Won't detain
Our workers from gainful pursuits."

The economist frowned with sagacity:   
"The work from the cleanup will pass," said she;  
"Beyond current enjoyment,
This surge in employment
Isn't building tomorrow's capacity."  
  
- Inspired by economist Jodi Beggs' interpretation of the classic "Broken Window Fallacy" in her blog, Economists Do It With Models.

Message from the White House

Said the President: "Oil is finite,
A resource that's now in its twilight;
So the deeper we drill,
The greater the spill,
As the recent misfortune may highlight."

Brutish Petroleum

BP is a comp'ny most hated
For this oily mess they've created,
But it won't be the worst
If our national thirst
For petroleum stays unabated.  

Overheard at a BP Board Meeting

"Well gents, I hain't got the stomach
To see 'ow far our share price will plummeck
So let's shear off the top
And siphon this glop
Before it seeps up the Potomac."

In too deep?

The story of deepwater drilling
Is laden with dangers quite chilling;
Says BP's Tony Hayward:
"Our safety, though wayward,
Will hereafter get the top billing."