Barking At the Moon

Jim Brown
Printer Friendly Version

The International Energy Agency is doing the equivalent of barking at the moon with their latest plea to OPEC nations to increase production. It has no impact on OPEC other than giving them a reason to laugh. Asking them to spend money to produce more oil so they can sell it cheaper is a lost cause.

The Executive Director of the IEA made another plea on Tuesday for OPEC to produce more oil even if it was the heavy, sour crude they have in excess. Nobuo Tanaka said there would be plenty of buyers if OPEC priced the oil correctly as in "cheap." He said refineries will buy the oil and deal with the impurities as long as it is cheap enough to make it worthwhile.

The problem with that theory is the part where the selling price is lower. Many OPEC nations are dealing with civil unrest and need the additional cash from high pried oil to pay for security and to fund stimulus programs to keep the population happy. They actually need more per barrel not less.

OPEC nations know they could be selling the heavy, sour crude for less and it would sell. However, for every million barrels they sold it would reduce demand for the lighter, sweeter variety they are currently selling for high prices. They would be receiving less money and that is not acceptable in today's environment.

They also know if they wait until demand rises and there is not enough light sweet crude to go around they will be able to sell the heavy sour crude for more money. It is a win-win for OPEC and they have plenty of time.

The risk for OPEC is the prices rising so high that global demand slows abruptly like it did in 2008. They need to be aware of the prices and try to prevent the next fuel recession from occurring. Unfortunately most OPEC nations are motivated by the greed factor and they each want to be the last country to produce more and cause the price to drop. They are in the drivers seat and this bus is not going to slow down until it is too late.

As U.S. average oil prices move over $4 this week the uproar in the press will grow significantly. The election cycle is in full swing and gasoline over $4 could take away the ratings bounce President Obama got for the successful termination of Osama. That means the verbal attacks on big oil will escalate as politicians try to find someone to blame for high prices.

Gasoline demand has already begun to slow. The EIA said demand last week was 205,000 bpd below year ago levels. MasterCard's Spending Pulse report showed a sixth consecutive week of demand decline.

Over $4 is the magic level where nonessential driving begins to decline significantly. Even businesses will begin to limit driving to reduce expenses. I personally believe the sudden fall off in economic activity over the last four weeks has been to the rising fuel prices. Every penny rise in fuel prices costs the U.S. consumer $1.4 billion a year in extra fuel bills. Gasoline this week is up more than $1.06 from the same period last year. That means Americans are going to pay $148 billion more in fuel expenses in 2011 than in 2010. That is a major undeclared tax hike and it will impact business and consumer spending.

When gasoline demand goes down so does sales tax revenue. Federal, state and local taxes are collected on every gallon of fuel sold. When high prices force conservation it reduces the amount those entities collect. That means additional budget shortfalls, less road repair and construction and more layoffs for government workers and construction crews.

The EIA said this week that U.S. crude imports fell to an 11-year low in February. Imports fell by -1.056 mbpd in February to 8.013 mbpd. The last time imports were this low was January 2000. Imports from Mexico fell by 220,000 bpd, Nigeria -20,000 bpd and Venezuela -73,000 bpd. Oil from Iraq declined -7,000 bpd, Columbia -42,000 bpd and Algeria -240,000 bpd.

This drop in imports from multiple countries should be a clear warning that oil production around the world is falling. The peak oil deniers continue to say there is plenty of oil but the shipments don't lie. Last week I wrote about Mexico and their potential to become a net importer by 2020.

Get used to high prices for gasoline. There will be highs and lows as demand is destroyed and then rebuilt but the long-term outlook is ugly. OPEC has found a new strength in refusing to increase production and the rest of the world is losing export capacity due to declining production and rising internal demand. The future is not bright and will involve a long term fuel recession as the world leaves the age of cheap oil and moves into the constantly rising prices of peak oil.

Jim Brown

This newsletter is only one of the newsletters produced by OilSlick each day. The investment newsletter is also produced daily and contains the current play recommendations in the energy sector. Stocks, options and futures are featured. If you are not receiving the "Play Newsletter" please visit the subscribe link below to register.

Subscribe to Energy Picks Newsletter

See a list of our closed plays from 2010 here: Closed Positions

The OilSlick Newsletter is based on the expectations for global oil production of light sweet crude to peak and begin to decline in the 2012-2014 timeframe. I am calling this "Peak Sweet™" instead of Peak Oil. This is the point where global production of conventional light sweet crude supplies can no longer be supplemented by enough oil sands production, deepwater oil production, biofuels and natural gas liquids to offset the decline in existing fields. The roughly 6% annual decline of existing production due to depletion is larger than the rate of new discoveries and new production being added each year. The Peak Sweet™ countdown clock is ticking and time is growing short. Peak Oil will arrive shortly thereafter. Are you prepared?