I doubt the numbers being bandied about regarding prices at the pump actually reflect the real economic consequences.
I'll probably take some flack for this, but I believe it's true. The only thing that matters is the price of gas in California and New York.
The USA has evolved into a two-tier gas market. The supply of crude from Canada and the Bakken fields has created a lower cost of supply for the central portion of the country. This differential is most notable in the market spread between WTI (a futures contract that settles physical delivery in Oklahoma) and LLS (Louisiana Light Sweet Crude) - the pricing of crude for the big Gulf refineries.
These charts show the WTI and the LLS pricing over the past year.
While both crude prices have risen significantly of late, what jumps out is that the LLS pricing broke through the highs of ten-months ago, while WTI has not.
Consider this map of the country. The green area is where the Canadian crude is helping to keep prices lower. The dark red areas are those that are dependent on the high-priced, imported crude.
Gas prices are north of $5 in southern California today, but they are as low as $2.95 in Ft. Collins Colorado.
While this may make the folks in Colorado and North Dakota happy, it will crush the national economy. It doesn’t matter what happens in Co. or N.D., they have (relatively) no cars.
A few years ago, the Highway Transportation Department put out a report on registered vehicles by state. The total of all registered vehicles was 244,000,000. Of that total, 33 million were on the roads of California (13%), only 1.8 million (0.75%) were in Colorado, and a measly 700k (0.25%) are in North Dakota. The total of vehicles on the road in the states that are in red in the above map comes to 137 million. Fully 56% of all vehicles are in high cost states. Only 15 million vehicles (6% of total) are registered in the green states!
State GDP is directly correlated with vehicle registrations. The red-colored states, paying the highest prices today, represented 57% of 2010's GDP. Green states, contributed only 8% GDP.
My thoughts:
-Crude prices in Louisiana hit their highest in a year on Friday. If this level is sustained (or heaven forbid increases), the price of fuel in the red states will go up by 50 cents in the next few weeks. Forget about $4, start worrying about $5.
-California and NY will be hit the hardest. These two states represent 21% of GDP. It will be a big burden for the NY economy. For California, it could be a crushing blow. The national economy cannot expand without California growing. Cali is a very big portion of the pie.
-Given these facts, I wonder if the Administration is planning to release more oil from the Strategic Reserve. I bitched and moaned about this last July when the SPR was tapped. Following the June SPR sales, there was a multi-month drop in crude prices.
The SPR sales had little consequence; the drop in crude reflected a slowdown in global growth and an easing of concerns regarding Libya.
The Administration may look at the same charts as I did and conclude that it was the SPR sales that broke the market for a while. Folks who like to intervene in markets are biased to believe their intervention "works". This Administration would love to push down crude prices for another three months. It would take the gas story off the front page. It would help the economy from running into a wall.
This being an election year, it's possible that Obama will try an SPR sale. If gas is $5 in November, anything could happen.
If there were an SPR sale, any beneficial impact on prices would have a half-life of about 48 hours. This ain’t June 2011. If we should we see an SPR sale (low probability), buy that dip.
-The LLS crude price tracks Brent crude. (A tanker can go to Rotterdam or Louisiana, it will go to where the price is the highest.) If there is a Middle East supply disruption, it will affect Brent more than WTI. But for the red states, gas prices will track Brent.
-Greenspan remarked in July of 2010, “The economy appears to have hit an invisible wall”. Bernanke reacted a few months later with his Jackson Hole speech that brought us QE2. In the Summer of 2011 the economy hit another of those “invisible walls”. Bernanke delivered TWIST and Perpetual ZIRP. I wonder if Ben will try QE3 if the economy hits another those walls due to rising gas prices.
The thing is, if Ben tried another form of QE/LSAP the price of crude would be up $20 in a week. Bernanke is another of those who likes to intervene in markets. He also thinks it “works”. It won’t work this time; it will blow up in his face.
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C'mon Krasting get real, get rid of the damned car(s).
ReplyDeleteThe real price is going to go up: post-demand destruction there will be dirt cheap petroleum but everyone will be flat broke except Warren Buffett and Jim Rickards. All of this for the 'illusion' of mobility (status) and the reality of non-remunerative waste on a mind-boggling scale.
Do your part and get rid of the damned things. Jeezus Louieezus! Start walking and lose weight. Take the train, ride a bike.
Not me. I drive less than 10k a year.
DeleteHigher Gas prices will do more to promote drilling,conservation and the development of cost effective energy saving technologies than any measure Obama could take in Washington. While Obama can and should allow the Keystone pipeline to go -ahead this is no panacea, and tapping the SSR is pure optics and a temporary fix. Long term we need to accept the fact that low cost sources of oil are not going to be there and future sources will be more costly to get at.
ReplyDeleteThis might be wrong. There is enough shale gas in PA to run things for decades.
ReplyDeleteThe problem is it would destroy huge tracts of PA. I don't think anyone cares. The farmers and other landowners are being offered deals they could never have imagined.
So they move to south Florida. Who cares about PA?
I am now certain this is going to happen in a big way. It already is. I don't see see anything stopping it. You think environmentalists are going to get in the way of an energy source bigger than Saudi Arabia?
Peak Oil could be pushed out 20 or more years for the US.
You may be right. I stand corrected.
ReplyDeleteThere is a lot of known oil deposits in ANWR, and a lot more in the Gulf of Mexico.
ReplyDeleteUnlike caribou and monkfish though, the people of Pennsylvania vote.
The farmers can sell their land, move to Florida and have their savings decimated by The Bernank.
The people of Philli, Harrisburg and Allentown/Bethlehem may find their land doesn't cover the cost of retirement.
The people downstream on the Delaware (who are already effected to a smaller degree from Amish "fertilizer") also will have trouble retiring.
And all those short sighted bankers in Westchester / Hudson valley (ahem Bruce) ... you might do well to consider where your water comes from... are you going to write off NYC too?
Lets not forget that the putz in the White House needs the enviro-terrorist vote.
Whether the shale gas is really there is subject to debate (the DoE recently revised their estimates down almost 50%, and reduced their economically recoverable estimate down 67%).
I feel quite safe in stating as fact that even the oil company executives will think twice about polluting the water supply of Phili and NYC. The link between fracking and water pollution is not proven, but not tenuous either. Plenty for class action lawyers to work with.
I call bullshit on the whole shale gas scam.
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As for the Bernanke oil tax on NY and CA ... you get what you collectively voted for. You wanted 1970s Keynesian central economic planning, you WIN!!!
Seems like really convenient timing to help push the pipeline. My big issue is mpg footprints and car makers telling me what cars i want to drive. if we allowed tariff free imports and stopped protecting the insurance industry and ditched our safety standards which i think are bs anyway we could cut demand by a third. what we need is to do the opposite of what we are doing. Instead of giving exemptions to gas guzzling beasts why not give exemptions to high mpg cars that get over 60mpg. another stat i want is tons of polution per gallon. a 10 mpg american truck vs a 60 mpg pugeot, the smaller car that consumes less fuel has to create less polution probably even with no smog equipment.
ReplyDeleteWhat if East and West coasts of the US find their Ballen fields? Don't laugh, we found natural gas for next 100 years only recently.
ReplyDeleteWhat if we automate highways and eliminate traffic jams as well as perpetual stops at red lights, do we still have issue with $5 gallon?
What if we pay $1 a gallon to redo the infrastructure for automated traffic?
Nothing even close to 100 years supply -- more like 11 years, tops. Repeating this 100 yr gibberish does not make it true.
DeleteAutomating highways and eliminating traffic jams?
Please share where you buy the crack you are smoking.
11 years ? ? ? ?
Deleteget to rehab ASAP
Not even Obama's Dept of Energy agrees with the 100 yr lie.
DeleteDepletion rate is higher, environmental costs higher, transport costs higher.
Liberals political beliefs could not make solar power viable either.
I just stumbled upon your blog. Thank you for your thoughts.
ReplyDeleteMartin
If i remember correctly, its the blending and fungibility of various blends that can be a huge factor in pricing in the NY, Cal and Chicago mkts. Government mandated blends in these mkts can be used anywhere but are the most expensive, most other blends are limited in the jurisdictions they can be delivered to. I believe cramer described this as like having 50 different operating systems for computers....not very efficient. Which is why you are more likely to see a relaxing of blend standards if the price reaches a certain pain threshold. I would think that stategic reserve action is off the table while the Iran story continues to circulate.
ReplyDeleteAmerican consumers spent $460 billion (in real 2005 dollars) on "energy goods and services" in 2011,
ReplyDeletelowest level of spending on energy since $454 billion in 1998
For gasoline, I would think the location of the refineries is more important than where the oil is. My impression is that central u.s is still underdeveloped in terms of refineries, with most on the coasts, especially gulf.
ReplyDeleteNatural gas supply has little direct effect on transportation, which relies on liquid fuels here in the U.S.
ReplyDeleteIt is certainly possible to convert natural gas (or coal) to liquid fuels, but that process is not cheap.
Think of gas/coal-to-liquid as equivalent to refining gasoline from $200+/bbl. oil.
@Bruce: However, the current increase in WTI reflects more of an increase in speculative demand than a actual decrease in supply. If Iran stops the saber rattling and agrees to enter talks again with the IAEA, we might see oil again between $95-$100. http://tinyurl.com/6tnprlv
ReplyDeleteThe WTI/Brent Spread will be more noraml once the 835,000 BPD of pipeline/crude-to-rail capacity comes on-line to bypass Mid-continent oil to the Gulf Coast. It's starting with the Seaway pipeline and a few of the crude-to-rail projects in March 2012 but by 2014 there shouldn't be any bottleneck in Cushing, OK. That is unless Permian Basin/Bakken/Eagle Ford gets going better than predicted.
ReplyDeleteWhen or what year was the last refinery built.
ReplyDelete1950's!!!