I haven’t posted on oil policy and economics lately, but the world of oil has been interesting over the past couple of months and I’m overdue for an update.
There’s currently about a $15 to $20 dollar difference between the Brent Crude benchmark traded in London, and New York traded West Texas Intermediate, while historically the difference is generally within three dollars. Various explanations have been given for this big difference in price right now.
West Texas Intermediate contracts are settled out of the major oil distribution hub in Cushing, Oklahoma. Oil inventories at Cushing have been at record levels over the past six weeks, which probably helps to explain the lower price of WTI relative to Brent. I’m writing this Tuesday night, but data to be released Wednesday morning is expected to show an unexpectedly high drawdown in WTI inventory at Cushing. This caused a boost in oil prices on the New York Mercantile this afternoon.
If you buy gasoline or diesel or anything that depends on these fuels for production or transportation (such as your food), you’ve noticed prices are now at record levels for this time of year in spite of the huge inventories on hand. I had to laugh at an oil analyst’s recent claim that these current high prices are based on “a temporary combination of forces” which he lists as higher oil demand from China, cold temperatures in the USA, and the situation in Egypt.
China’s oil demand isn’t going anywhere but up — that’s clearly not temporary. The extreme cold we had increased demand for natural gas and fuel oil to some degree, but transportation fuel demand actually dropped significantly resulting in a net decline in distillate demand in the United States.
The revolution in Egypt may have increased the price of crude in London trading to some degree. While about 2 million barrels are shipped via the Suez Canal every day, there’s plenty of spare tanker capacity to ship crude around the Horn of Africa to European markets. This longer shipping distance only adds about a week to the total shipping time, which isn’t enough to cause supply problems.
Other factors contributing to Brent Crude trading over $100 in London are a weakening U.S. dollar and a precipitous drop in North Sea production.
Add this into the WikiLeaks revelation that Saudi Arabia routinely lies about their true oil reserves and we’re living in interesting times indeed. My dad (who at age 70 grows some of his own food and lives in a house warmed and powered with wind and solar power) advises me to stock up on toilet paper. Given that half of our American political leadership are paralyzed into inaction while the other half lives in absolute denial about our declining energy lottery jackpot, I think that’s pretty good advice.