The Oil Drum

Mr. or Madam President,

Vice President Dick Cheney once famously quipped "The American way of life is non-negotiable." I submit that while our next president might not be so brash in stating this, the root of our energy problems can be traced to this attitude. But, nature doesn't negotiate. It doesn't appear that any of the remaining presidential candidates understand the basis of the problems we face: Oil is a depleting, finite resource - albeit one crucial for the "American way of life."

Because this resource is so crucial - and obviously not just for Americans - depletion is going to drive prices up as consumers bid for dwindling supplies. Threatening to sue OPEC isn't going to change that. Threatening to tax Big Oil into submission isn't going to change that. Mandating that we will invent new technologies to meet a greatly increased Renewable Fuel Standard isn't going to change that. These are the sorts of proposals that merely demonstrate that your grasp of the problem is superficial. And you have to understand the problem in order to begin addressing it.

John McCain, who just hours earlier proposed a "tax holiday" in which the 18 cent federal tax on gasoline would be suspended during the summer driving season, has reconsidered and has instead proposed that the U.S. gallon be redefined to be equal in volume to the current U.S. quart. "This will immediately lower the price at the pump by 75%, providing visible relief to millions of Americans", quipped McCain. "I rejected the idea of setting it equal to the liter, for obvious reasons".

When questioners suggested that this move wouldn't actually change how much consumers spend to fill their tanks, McCain responded "Well, neither would my previous proposal".

In unrelated election news, the McCain campaign announced that P.T. Barnum has been posthumously appointed as their policy director. Also, Hillary Clinton has proposed a suspension of the law of gravity, at least during the summer flying season, to help the beleaguered airline industry. Barack Obama reportedly had no comment on these suggestions, other than to say that Americans are definitely "atwitter" about gas prices.

We interrupt this vacation from reality with the following observations...(under the fold...)

I haven't reported on inventories in about a month, because there really weren't any developments that merited a report. While crude, distillate, and propane inventory levels have been typical for this time of year, the gasoline situation is worth a note.

It sort of crept up on me, but last week as I reviewed This Week in Petroleum, I was struck by just how fast the U.S. has built gasoline inventories. Currently at 230 million barrels, I could not recall ever seeing gasoline inventories that high. So, I went back and looked, and the last time gasoline inventories stood at this level was in 1994. And in this week's report, we again had an increase in gasoline inventories:

Higher energy prices are feeding through to rampant consumer energy price inflation. And yet the authorities and many investment houses still see energy prices falling in the future. This naive view of global energy supplies is starving energy markets of the capital required to expand conventional and alternative energy supplies.

Global annual average natural gas spot prices from the BP statistical review of world energy 2007. Click all charts to enlarge

Updated

Gasoline inventories did in fact edge upward, as gasoline imports were very strong. Had that not been the case, gasoline inventories would have definitely come down, as utilization continues to trend down. In fact, just glancing over the data, more gasoline may have been imported this January than in any other January before. As long as that continues, gasoline prices won't gain much traction. But European refiners have to take turnarounds as well, so gasoline imports typically fall off in February and March.

Updated:

Not too much to get excited about. Those reports of some refineries coming down early for turnarounds due to low margins look to be accurate, given the drop in refinery utilization. That would also explain the rise in crude inventories, but typically you start to see gasoline inventories coming down as the refineries come offline. Gasoline production did fall, as one would expect as turnaround season begins. However, gasoline inventories increased on the back of very strong gasoline import numbers.

With all of the traveling, and then trying to catch up after the holidays, I haven't had time to do a proper TWIP. Thanks to Nate for looking after it during my vacation. Anyway, mostly what we saw for the past month were crude draws, and gasoline inventories climbing back up and getting in pretty good shape prior to spring turnaround season. Part of the draw down in crude was tax-related. Many countries, including the U.S., tax crude inventories at year end. So, there is a bit of a balancing act as refiners try to draw down inventories while still maintaining enough on hand to weather any supply disruptions.

This week saw a large gain across the complex, and crude prices are falling as a result.

Updated: You would think if last week’s large inventory drop was due to fog-induced delays, all of that crude would show up this week. Not so, as another drop in crude inventories was recorded:

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) dropped by 0.7 million barrels compared to the previous week. At 304.5 million barrels, U.S. crude oil inventories are in the upper half of the average range for this time of year. Total motor gasoline inventories increased by 1.6 million barrels last week, but are near the lower end of the average range. Both finished gasoline inventories and gasoline blending components inventories increased during this period. Distillate fuel inventories decreased by 0.8 million barrels, but are in the lower half of the average range for this time of year.

Update following the release:

Big surprises all around this week:

Summary of Weekly Petroleum Data for the Week Ending November 30, 2007

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) dropped by 8.0 million barrels compared to the previous week. At 305.2 million barrels, U.S. crude oil inventories are in the upper half of the average range for this time of year. Total motor gasoline inventories increased by 4.0 million barrels last week, and are below the lower end of the average range. Both finished gasoline inventories and gasoline blending components inventories increased during this period. Distillate fuel inventories increased by 1.4 million barrels, but are in the middle of the average range for this time of year. propane/propylene inventories decreased by 0.5 million barrels last week. Total commercial petroleum inventories decreased by 3.8 million barrels last week, and are in the upper middle of the average range for this time of year.

2nd Update

Crude was down sharply following today's release. The AP explains:

NEW YORK (AP) — Oil's rise to $100 a barrel, which seemed a done deal as recently as two days ago, was dealt a severe blow Wednesday when the government reported an increase in supplies at the Nymex delivery terminal in Cushing, Okla., which is closely watched by traders as a benchmark of oil inventory tightness.

Overall crude supplies fell during the week ended Nov. 23 by 400,000 barrels, in line with the 500,000 barrel decrease analysts had expected. But that decline was overshadowed by a 600,000 barrel increase in inventories in Cushing, Okla. Cushing inventories are up 13.4 percent in two weeks.

Activity at the Cushing terminal is studied closely by oil traders because it is the physical delivery point for Nymex crude. Falling supplies there are seen as a symptom of a tight market, and those concerns ease when Cushing inventories rise.

At this point, I think the only chance oil has of reaching $100 this year is if OPEC comes out of the meeting next week and really spooks the market. Of course every time I say that, oil runs up $8. But I do expect it to drop into the $80's pretty soon.