Tuesday, February 28, 2012

So What Happens If Gasoline Hits $5.00 A Gallon This Summer?

You gotta love the mainstream media. For months now the drumbeat has been about how the economic recovery in the U.S. is picking up steam, even though the only two indicators which are in agreement with that assertion are stocks and jobs, both of with are being relentless manipulated by the Federal Reserve and the Bureau of Labor Lying Statistics respectively. Nevertheless, despite the persistant propaganda designed to get the consumers suckers back into the malls and spending freely again, the media just can't resist the temptation to goose its ratings/readership/page views by doing a little scaremongering over rising gasoline prices. Numerous stories have appeared in the last week breathlessly proclaiming that gasoline prices will hit $5.00 a gallon by this summer.

You would think that someone would quickly spot the inherent contradiction here. After all, every recession since the 1970s has been preceded by a spike in oil and gas prices. But, surprisingly, you would be wrong about that, as shown by an article which appeared over the weekend on MSNBC.com. The title, "8 Reasons Why Gas Will Hit $5 a Gallon This Year," seems straightforward enough, but let's take a closer look at their supposed "expert" analysis. Here are the reasons from the article listed in order, followed by my commentary:
1. Strait of Hormuz
About 20 percent of the crude oil produced in the world is shipped through the Strait of Hormuz, and Iran has threatened to shut down shipping traffic through the Strait. At its narrowest, the passage is 30 miles wide, so there is a realistic case that a conflict could close it. Iran has already been isolated as a trade partner by U.S. and EU sanctions. The regime in the country has made a number of threats about what it might do if its “national interests” were threatened. If Iran follows through with its threats, the period the passage is closed could be very brief if the U.S. Navy, which has a carrier group in the region, moves to reopen the lane. But it is not clear that the American government would make that decision without the open support of allies or the United Nations. A closure of the passage, or any escalation that would make a closure more likely, will drive oil prices higher -- and by extension, gasoline prices.
No argument there. Tensions involving this key oil transportation checkpoint are certainly putting speculative upward pressure on prices. Let's move on.
2. Iran
Iran contributes to a second problem in terms of global oil supply well beyond that of its ability to interrupt supply. Because of the embargo against the nation due to nuclear weapons violations, the U.S. has pressured large oil importers such as Japan to act to isolate Iran by cutting their imports. This puts Japan in a position in which it has to tap even tighter global supply. Japan apparently has agreed to cut its Iranian crude imports by 20 percent. But as the world’s third largest oil importer, Japan indeed will have to get its oil somewhere other than Iran -- which will put more pressure on current production.
Not sure I agree with this one. The sanctions against Iran are laughably self-defeating given that China and India have shown no inclination to join the embargo against Iranian oil, and as long as Persian oil is being bought somewhere, there should not be any corresponding increase in world oil prices as that just means those two countries will buy less elsewhere.
3. Refiners raising prices
Most of the oil refined on the east coast of the U.S. is Brent crude, a type of oil produced from the North Sea. The price of Brent -- more than $124 a barrel -- is almost $16 higher than the price of West Texas Intermediate (WTI) crude, the amount most people read about in the media. But because Brent has replaced WTI as the global price benchmark, U.S. refiners set prices for gasoline and other products as if Brent were the only grade of crude used. That allows refiners with access to cheaper WTI to make larger profits.

However, when the prices converge, as happened in the final two months of 2011, WTI refiners lose their edge -- and their hefty profits. “Refiners were losing money in November and December. You can only lose money for so long,” John Felmy, chief economist for the American Petroleum Institute, recently said. Many large refineries are owned by public companies that do not have much appetite for posting ongoing losses. To avoid losses, refiners will have to increase gasoline prices.
Can't quibble with this one in light of the recent refinery shut downs in Pennsylvania and New Jersey, which certainly wouldn't have happened if they were turning big profits.
4. Other geopolitical risks
Iran does not present the only geopolitical challenge to oil production. In Nigeria, which is the 14th largest producer of oil in the world, Islamic terrorist group Boko Haram has continued to attack Christian areas of the country. The Nigerian Army has reacted by attacking Islamists. Militants have continued to attack pipelines, apparently in a move to disrupt the government.
This segment went on to mention Venezuela and other unstable Middle Eastern countries, but I've left that part out for brevity's sake. Again, no argument here.
5. The EU may save itself
For now, Greece has been bailed out again -- a move that should buoy confidence in the region and encourage demand for oil. Even with the Greek bailout, however, the eurozone is not out of the woods as nations continue to implement austerity measures to protect against the risk of default on sovereign debt.
Also edited down for brevity's sake. Can the EU muddle through for another year? Well, it pretty much muddled all the way through last year, so it certainly is possible.

But here is where things suddenly begin to go completely off track and way out into la-la land:
6. U.S. economic recovery
An improved U.S. economy means higher oil prices. U.S. GDP, employment and even housing have all staged unexpected improvements in recent months. Many economists now peg a 2012 GDP increase at more than 2 percent. The new White House budget assumes growth of 3 percent by 2013. An average of more than 100,000 jobs has been created in each of the past six months. And an extension of payroll tax cuts through the end of this year may further aid the employment recovery. An extension of unemployment benefits means that hundreds of thousands of American who would have no income, will have at least enough to consume basic goods and services. The argument that Americans now drive less is not a powerful one for gas and oil demand when a healthy economy also means more consumption of oil for business, petrochemicals and jet fuel. Demand for oil-based products across the entire economy will pick up with any recovery.
Even if you buy the recovery propaganda, how can any rational observer of the economy not realize what will happen to the American consumer well before gas prices hit $5.00 a gallon? Is 2008 really that far in the past that it has been completely forgotten? That year, gas prices topped out in July at a national average of $4.11, and the shock to the system was so traumatic that it helped trigger a deflationary crash across the financial sector. By January of 2009, gas prices bottomed out at $1.61 (figures courtesy of the chart above from Gas Buddy.com). Yet we're supposed to believe that prices shooting towards $5.00 wouldn't cause an even worse economic shock this time around?

But wait, it gets even more absurd:
7. Summer
In the U.S., summer vacation driving has historically boosted demand for gasoline. Over the past three or so years, however, that boost has been small, if present at all. In 2011, U.S. traffic volume decreased year-over-year in every month except January and February. But that was last year. So long as the U.S. economy continues to improve, more drivers will be on the road this summer.
Right here we see the blind spot of every economic commentator who uses the raw jobs figures to back up the claim of economic recovery. Are there more jobs now than there were a year ago? Undoubtedly. Are most of those newly created jobs the kind of stable, good paying positions which would allow their holders to take a couple of weeks off this summer and take the family out for a long driving vacation? Unlikely. It seems like many of those who get paid to write articles like this one in the mainstream media think that everyone who has a job is as comfortable and well off as they are.
8. Supply risk
In December 2011, OPEC members produced nearly 31 million barrels a day, cutting the cartel’s spare capacity capability from 3.18 million barrels per day to 2.85 million. Saudi Arabia accounts for 2.15 million of those daily barrels of spare capacity.
Again, edited down for brevity. Maybe Saudi Arabia has that spare capacity. Maybe it doesn't. No one outside the desert kingdom really knows for sure. But at least the article ends on a more sensible note.

To sum up, there are a lot of very good reasons to believe that oil and gas prices are going to rise higher in the coming months, but reasons six and seven listed above are absolutely laughable in their absurdity. The fact that they were included in an otherwise relatively astute analysis shows just how powerful the propaganda spewed forth by the Hologram really is.

What will happen if gas prices hit a nationwide average of $5.00 a gallon this summer? Personally, I think that absent a war with Iran we're not going to find out. Because while the economic free fall we experienced in late 2008 and early 2009 was halted by the enormous increase in federal deficit spending and the loose monetary policies of the Federal Reserve, the economy is far too fragile withstand prices surging to that level. Almost certainly, another financial market crash will short circuit the rise in gas prices well before they reach those lofty heights, at least for this year.

Bonus: "Putting out the fire with gasoline"


  1. The thing that worries me about a war with Iran (apart from the terrible loss of life such a conflict will cause) is that while the US navy may well be able to keep the Straits of Hormuz open, Iran may use its offensive capability to attack the oil infastructure of the region. This would make more sense that going toe to toe with the US navy and if they destroy the regional oil infrastructure it makes no difference if the straits are open, no oil will flow anyway.

    Another great unknown about a war with Iran is how Russia and China may react. Iran is also a much more dangerous enemy than the Taliban or Saddam.

    As you say Bill, China are happy to deal with Iran for oil. The embargo is just hurting US allies like Greece and Italy who buy a lot of oil from Iran. It is adding to the euro crisis. The west is shooting itself in the foot and I wonder about the ability of the western powers to win a war with Iran, I could easily see a war that everyone looses.

    1. I agree. If a Sunburn missile can do nasties to a carrier, imagine what it can do to a stationary target which can't defend itself. IE an oil terminal or pumping station. How about onshore tank farms? While the Iranian fast boats and shore based missiles turn the Strait of Hormuz into a shooting gallery with the USN running round like a chicken with its head cut off, secondary launches or strikes can destroy the oil infrastructure.

      But s'ok, your government will keep pushing Iran til something DOES happen.

  2. I park at a gas station every single weekday to drop off my kid.

    Yesterday the price of gas at a Sonoco Station (arguably one of the cheaper places around here) was $3.81.

    Today it is $3.93.9... ie $3.94/gallon.... it is going up ALMOST DAILY....

    I can see it passed the $4.11 mark before Easter.... In the end it will be a precursor to an economic crash. It is not far away.

    1. I am 65. I can remember riding in the back seat of our 1952 Chevy 235 six cylinder 2 speed powerglide. My dad was going to get gas. One side of the street had gas for .19 cents a gallon. The other side of the street had it for .20 cents a gallon. This was called gas wars, or gas price wars. Ever since the gas prices over the years has gone up not down. Just like everything in our and the worlds economy. Everything is tied to yhe price of a barrel of crude oil. Taks a .5 cent Snickers bar. Well it was .5 cents when I was a kid. Inflation hits EVERYTHING. I heard on the radio that the world wide economy and competition will some how bring the price down? Oh yea prove it. As far as this old fart views the world, I have not seen any indication of gas returning to the .19 or .20 cents a gallon. At least I am old enough to remember penny candy and such. Movies were .25 cents, a bag of popcorn was .5 cents, coke was a dime. For .50 cents you could have a ball on Saturday.

  3. For anyone desiring to get a broader concept of what oil is about, I'd suggest going to www.incubatepictures.com and clicking on "there's no tomorrow". Thirty four animated film covering the broader aspects. By broader aspects, I mean beyond alternatives will save us, they discovered x billion barrels in North Dakota, there's an endless supply if we just do whatever, there's wonderful new technologies and wishful thinking of new technologies.

    The energy picture is far, far more complex than anything I read in the mass media or most blogs for that matter.

    1. I did a post and linked to "There's No Tomorrow" back on February 15th. Thanks for the timely reminder. Definitely a must watch.

  4. Good write up, one additional unforeseeable factor that could help oil prices this summer would be another hurricane season like 2004. I don't think that'd make gas $5.00 a gallon for the entire country, but it is an unforeseeable factor that could help prices.

    Regardless, I feel like I'm riding in a car with a driver who only watches the breaklights of the car in front of them instead of two or three cars ahead. $5.00 per gallon isn't the top of some imaginary mountain.

    In 2009, China surpassed the United States as the world's largest automobile producer by volume. In 2010, both sales and production topped 18 million units, with 13.76 million passenger cars delivered, in each case the largest by any nation in history. http://en.wikipedia.org/wiki/Automotive_industry_in_the_People's_Republic_of_China

    1. Rusty - good call on the hurricanes. It's been relatively quiet for several years on that front, but a bad year could make things very interesting, indeed.

    2. I agree, hurricane season has been particularly kind to the US the last few years. It can't last. Given the weird weather we've seen all over the world this last year, I'm willing to say the grace period is about up. And the ones that do come are likely to be greater in intensity than normal if all the stuff I've been reading is anything to go by.

  5. Climate Chaos, meet Economic Collapse ... both of you meet ....Peak Oil.

    Going to be a very very interesting *party* indeed.

    It's the hangover you have to watch out for.

    1. Indeed, I think someone just rearranged the deck chairs - a bit...