President Obama announced today that U.S. Attorney General Eric Holder will assemble a “Financial Fraud Enforcement Working Group” to investigate oil market manipulation. The price of gas — approaching $4/gallon nationwide and around $4.20 in California — is surely the fault of cheating Wall Street dirtbags, right? Upstanding, middle class, salt-of-the-earth American citizens such as you and I could never be responsible for such a horrible thing!
Energy analyst Phil Flynn responded to Obama’s announcement:
This is political cover for a failed energy policy. People are angry at the prospect of $4 gasoline and Obama needs a scapegoat. Oil companies have been blamed too many times so now it’s the turn of the speculators.
Rather than searching for a boogeyman I can tell the President why oil prices are so high. There are obvious fundamental reasons for it: We’ve got the biggest threat to oil supplies since the Arab oil embargo while the U.S. dollar has plummeted as a result of the budget deficit and Federal Reserve policy.
Libya’s exports are down over one million barrels per day. Saudi Arabia claims they beefed up their own production to make up for Libya’s shortfall and all of our major media outlets parroted these claims. If you look at the actual export data available from the US Energy Information Administration (EIA) and the International Energy Agency (IEA), however, we see Saudi Arabia increased production by about 400,000 barrels/day.
- Turmoil in Middle East and Nigeria add risk, which translates into higher prices for futures markets.
- Libya crude exports dropped abruptly by 1.3 million barrels per day.
- In spite of claims that they would increase production to make up for Libya shortfall, Saudi Arabia increased production only by about 400,000 bbl per day.
- Chinese domestic shortages forced authorities to halt exports from China and increase imports.
- Japanese bookings sharply up for reconstruction and power generation needs to replace lost nuclear capacity.
- U.S. gasoline stocks decline larger than expected as American consumption remains unabated in spite of higher prices.
In the meantime, China has completely halted oil and distillate exports because of domestic shortages, which further tightens the global oil market. While the tsunami drastically cut Japan’s oil imports by about a third, bookings to Japanese ports are already sharply up over last year as Japan will need liquid fuels for reconstruction and to replace the electrical power generation capacity lost with their nuclear power disasters.
Analysts expected U.S. gasoline supplies to drop by a million barrels last week and were shocked when the US EIA reported a seven million barrel decline — the largest one week drop since 1999. That immediately led to an 8 cent increase in gas prices. Gas stocks dropped another two million barrels this week. As of yet, U.S. demand remains unabated as we continue to consume 9 million barrels of gasoline per day, so expect gas prices to creep up even more over the coming weeks.
Lest you believe environmental regulations and a hostile regulatory environment are to blame for restricting domestic fossil fuel production, we have the highest drilling rigs in operation in the U.S. since 1987, many of them in North Dakota boomtowns working the Bakken formation. The American Petroleum Institute will continue whining about their high cost of doing business in the USA. They’re in a high risk business with huge cash outlays required, but when they strike it rich, they strike it really rich, while the local communities can just suck it up.
Friday, April 22 2011 is Earth Day. I generally try to avoid preaching (too much) about the environmental and financial benefits of riding your bike, but Obama’s announcement just makes it too easy. Ride your bike to work and save a few bucks, okay? Besides that, it’s kind of exhilarating fun.
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