Crude levels: How do we slow the flow?
Today's Financial News - Posted January 22, 2009
Crude is flowing into the country faster than we can use it, yet gasoline prices have been on the rise. What gives? It is another lesson in supply and demand… and greed.
By Andrew Snyder, TodaysFinancialNews.com
Baltimore – (TFN): They should be handing Dramamine pills in New York and Chicago today. No matter what market I visit, volatility is king. It has been an up-and-down day for the equity traders on Wall Street, but the boys in the oil pits have been having just as much trouble holding onto their lunches.
Just as the inventory of new cars, computers and clothing are stacking up in parking lots and warehouses across the country, the nation’s crude oil inventories are overflowing. Six months ago we were wondering where we were going to find enough oil to satiate the nation’s demand. Today, we are wondering just where in the heck we are going to put it all.
Earlier today, the crude markets shaved nearly 6% off the price of oil after the Department of Energy told traders that crude inventories rose by 14 million barrels in the last week. With about 14% more oil than we had this time last year, many storage sites are at or very close to their limits.
Greed imbalance
Today’s information shows that the laws of supply and demand have reached an imbalance. Production has not slowed nearly enough as demand has waned. Even falling prices, the free market’s way of getting greedy consumers to increase their buying, has not been enough to alleviate the imbalance.
Production levels have been cut, but now we will find out if OPEC producers cut as much as they say they have. Chances are, they are trying to squeeze every barrel of crude through the economy that they possibly can.
But now that inventories are about to spill over the rim, OPEC does not have a choice. Even worse, prices will have to drop even further in a last-ditch effort to try to get consumers to open their wallets. If not, even more tankers will be anchored off our coast.
This phenomenon is helping to prove that crude oil is both a leading and lagging economic indicator. It can be considered a leader because crude is one of the first things consumers buy when they get some free cash. With a thicker wallet, we drive to stores, go on weekend vacations, and simply leave the house more often.
But the nation’s manufacturers use crude as a base for many of their products. And we all know, after hearing of scores of layoffs and production shutdowns, the nation’s industrial sector is in a steep decline. It may be several quarters before assembly lines are running any faster. That means crude demand from the sector will not rise anytime soon.
But you and I are not as concerned with crude inventories and prices as we are about the products that come after oil is refined. After all, few of us actually drill oil from the ground and even fewer of us are in the business of storing excess oil (although it is quite lucrative right now).
Unfortunately, the nation’s refiners are much better at matching their supply to our demand. With the turning of just a few valves, the nation’s refiners can reduce their refining capacity in an effort to keep the market balanced in their favor.
This phenomenon explains why gasoline prices rose by about half a penny over the last week, even though refineries cut their output by 1.9 during the week to an average rate of 83.3 of their total capacity.
Fortunately, gasoline inventories soared just like their thicker, blacker base. Supplies were up by 6.5 million barrels last week. That was enough news to slash about 10% from gasoline futures contracts. You can expect to see that figure reflected at the pump next time you fill up.
The nation’s economy is slowing at a drastic pace. It is giving consumers are good shot at how one of the most basic laws of economics, supply and demand, control the way our nation works.
Supplies are on the rise that means prices are on the way down.
My prediction… we will see $20 oil by the first day of spring.
Next Article: Harley Davidson’s bikes are stacking up but profits… not so much
One Response to “Crude levels: How do we slow the flow?”
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January 22nd, 2009 at 6:03 pm
The disparity between crude and pump is indicative of an industry with deep hooks into the government, at al levels. Lobbyist and open handed legislators have been so unsupervised for so long, neither feel the inclination to even muster a lie to cover their infinite raping of the American people.
They used to at least give some time and thought into their spin. They have cleverly and consistently raised the pain (price) threshold so that no matter the rising reserves, lower demand, cheaper transportation costs (tankers) and falling crude prices, “they” continue to charge a premium with no one overseeing them.
My major recommendation is to drill here. Use our money to buy our oil, pay our guys, buy our equipment, transport it with our trucks, etc. Also a “use or loose it” policy; no drill no option. In addition for every rig add mandatory windmills or solar collectors (with a bit of tax help).
And finally (not really),close our borders both to legal and illegal. Give us a 12 month break (exceptions for “one of a kind” professional) While the borders are closed, cut foreign aid to humanitarian causes only.
Give us a chance to regroup. Bolster our own nation. Fix US.
Lets look ahead a year. Gas prices are stabilized (not necessarily the cheapest in the world, but predictable.) Renewable energy is on the rise and becoming less expensive. The money spent on harvesting our oil is spent in our country. Oh my God, it is up too because we quit importing billions of barrels of foreign oil. Foreign countries are lined up again for our help. We get to choose our team all over again.
Sounds way to simple. …..Nah, it would never work, let’s just keep everything the same, it is so much easier.