U.S. Calms Surging Oil Prices (Intervention Bold but Risky Move)

The Moscow Times ^ | September 1, 2005 | George Jahn

[Jomini]

Crude oil prices turned lower Wednesday, after a top U.S. energy official said the government would release oil from its reserves. Prices had earlier climbed back above $70 per barrel on concern about the extensive damage Hurricane Katrina caused to oil platforms and refineries in the Gulf of Mexico.

The announcement reflected how seriously the U.S. administration viewed the situation -- the reserve is meant to cushion the nation against national emergencies.

U.S. Energy Secretary Samuel Bodman said the government would release an unspecified amount of oil from its strategic petroleum reserves, a move designed to give refineries in the Gulf Coast area a temporary supply of crude oil to take the place of interrupted shipments from tankers or offshore oil platforms affected by the storm.

Light sweet crude for October delivery on the New York Mercantile Exchange rose as high as $70.65 before slipping back after Bodman's comments to $69.29, down 52 cents from Tuesday's settlement price.

Still, the move would not remedy destruction to refineries churning out much of the unleaded regular and premium grade used in the United States. That damage was sure to cut into already tight supplies, driving prices up not only on the trading floor but also at the pumps.

In a reflection of what will soon hit car owners in their wallets, gasoline prices, which closed up 20 percent Tuesday, continued climbing Wednesday. Unleaded gasoline rose by more than 6 cents to $2.5350 per gallon (3.8 liters) by afternoon in Europe.

"Hurricane Katrina is going to cost everyone, no matter where they live," said Platts, an energy reporting agency. "It's just a matter of time before the effect will be seen on the pump price."

Heating oil fell nearly 3 cents to $2.0490 a gallon, reflecting expectations that U.S. figures due out later Wednesday will show an increase in stocks.

The U.S. Minerals Management Service said Tuesday that 95 percent of the Gulf of Mexico's oil output was out of service, with more than 4.6 million barrels of production lost since Friday.

October Brent crude fell 21 cents to $67.36 a barrel on London's International Petroleum Exchange.

Oil prices are about 60 percent higher than a year ago.

Still, with gasoline supplies already tight before the storm hit, analysts suggested that additional troubles caused by refinery shutdowns would be of most concern to U.S. drivers already beset by high prices.

"Crude is a sideshow here," said Paul Hornsnell, head of energy research at Barclays Capital in London. "We were expecting gas to spike even before the storm hit because the situation was already very, very tight -- refineries were having trouble increasing production and inventories were [already] at a 20-month low -- and that was last week."

Eight refineries were shut down due to Katrina -- half of them producing gasoline. Vienna's PVM Oil Associates additionally reported at least three others flooded and power failures sidelining others.

Hornsnell said the damage translated into an estimated 30 million-barrel loss in gasoline output -- a problem that cannot be solved by increasing crude.

"In the next few months, there's no upside," said economist Mark Zandi of Economy.com, an economic consulting service. "And this winter, we're going to feel it more noticeably as people pay record gas prices and record home-heating bills."

[Jomini]

When the smoke clears from this storm the historians will use 20/20 hindsight to sabre without mercy those in charge. The decision to release the strategic reserve is a very hard move to make, sort of like calling a raise on the turn with only a draw. It does nothing to increase gasoline supply and throws an accelerant into the crude markets once the damn breaks.

All summer the skeptics scoffed at the so called "risk premium" in crude. There was a reason speculators were willing to unload massive volumes of dollars for the right to own oil. The release of reserves will stem the tide but ultimately the free market will reign in America until just before the end. Oil has no theoretical top at this time...

The West has never been more vulnerable...

J

[satchmodog9]

The release of any oil was a move to keep the rats at bay. I don't see how it can even be used since the refineries are down and whatever is running is operating at 95%. Refilling at 7o a barrel will cost big. We thought the 38 the reserve was filled with was high.

[Finalapproach29er]

America's oil- producing enemies are making a fortune in greenbacks.

[Avenger]

"The West has never been more vulnerable..."


Hmmmm, maybe I should put off buying that new Hummer?

[x5452]

It's up to 3.00+ on average where I live, the only place signifigantly lower was at 2.88 and PACKED.

[Crooked Constituent]

Didn't we just pass an energy bill? Oh nevermind, it probably doesn't have teeth anyhow.

These eco-jerks need to get real and quit choking out energy. Let's build refinerys and drill NOW.

[SlowBoat407]

Now if we could just get all those reserve refineries on line...

Oh.

[Jomini]

The storm has caught those in charge by surprise. Mr Fusion often quoted General Erfurth on how surprise has decided more close battles than any other element in history. From an economic perspective this event will have greater impact than 9/11 while producing similar societal aftershocks.

It is a defining moment.

Meanwhile the opposition watches as the perfect economic storm continues to brew. I will renew my search for Mr Fusion's classic treatise on the Eastern "stretch and break attack." Seldom have conditions seemed so ideal for that type of maneuver. No doubt Entente strategists are weighing this option.

Government intervention in the free markets is a risky proposition. There are always unexpected residual effects. Should the opposition successfully divine the next intervention -- and act accordingly -- then the house of cards will come down at a more rapid rate than currently sustained.

J

[RightWhale]

I have wondered why gasoline prices in Fairbanks are $2.50 or so like the rest of the country when we pull our few barrels directly off the TransAlaska Pipeline. We should be getting gasoline for 10 cents like Iraq and Venezuela. But then consider that the oil from the pipeline is sent to California where they don't seem to mind paying Big Bucks for our sour crude, and we probably wouldn't be able to buy any oil at all if we didn't pay the going rate. Too bad the State of Alaska didn't negotiate something about that at the same time they worked out the royalty deal.

[coconutt2000]

If this is truly a defining moment in our nation's history, the Democrats are going to be gnashing their teeth at not having someone in the Presidency to take advantage of it.

[Avenger]

"These eco-jerks need to get real and quit choking out energy. Let's build refinerys and drill NOW."

I absolutely agree. But perhaps we should also be cutting down on nonessential use of petroleum products? Just because it is the liberals who most frequently espouse this strategy doesn't mean that conservation in all its forms is a bad. Yes, we need to drill like mad everywhere we can regardless of the furry animals or sea creatures and we should have started 10 years ago, but we also need to stop driving 10 mpg Hummers to the office while abusing the intention of tax laws to get write-offs on said vehicles. I honestly don't think the Democrats or the Republicans are serious about reducing our dependence on foreign oil and this is why we are in the current predicament. While everybody is pointing fingers at everyone else, nobody has done anything.

[RightWhale]

Not to mention opening the spare city for immediate occupation by the former residents of NO.

[delacoert]

Let's see, crude prices drop and gasoline prices rise. Just exactly who does that help?

[WOSG]

"When the smoke clears from this storm the historians will use 20/20 hindsight to sabre without mercy those in charge. The decision to release the strategic reserve is a very hard move to make, sort of like calling a raise on the turn with only a draw. It does nothing to increase gasoline supply and throws an accelerant into the crude markets once the damn breaks."


Let me parry this breathless literature with plain prose.

Releasing from SPR *will* give oil to refineries whose sources are temporarily knocked out. It will help.

The decision to release oil is not hard ... the price of crude has topped out. In the eye of the storm it hit $70, after hurricane season, it will be back to the $50s, like it was in June.

"All summer the skeptics scoffed at the so called "risk premium" in crude. There was a reason speculators were willing to unload massive volumes of dollars for the right to own oil. The release of reserves will stem the tide but ultimately the free market will reign in America until just before the end. Oil has no theoretical top at this time..."

There is no theoretical top to tulips and pets.com either, but those bubbles burst and so will the oil bubble. Oil companies were willing to give away oil for $12 a barrel in 1998 and now 7 years later they demand $70. Why? Supply and demand.

There is no 'accelerant' here with releases SPR, that's an augmentation of 1 million in supply a day and a destraction of 0.5 million in demand a day, this is a big deal in a world where the difference in $12 oil and $70 oil was cutting the supply overage from 5 million barrels a day to under 1 million.

The days of tight oil supply are about to end, for the plain simple reason they ended the 5 or 6 times this happened before: it is the plain fact that the higher oil goes, the more people will change behavior to cut demand, and the more oil companies drill to create new supply. That new supply lasts 20 years in each well, and the new demand patterns last as long as cars do. Oil is peaking now, like it did in 1980,and oil is staring at a future downslope in price over the next decade, as supply comes online (about 10 million barrels) and the demand curve flattens out due to the high oil prices and the lag effect.

The Law of Supply and Demand will Not Be Mocked.

SHORT OIL.


"The West has never been more vulnerable... "
Nah, speculative bubbles come and go. And breathless fearmongering never goes out of style.

[WOSG]

I have wondered why gasoline prices in Fairbanks are $2.50 or so like the rest of the country when we pull our few barrels directly off the TransAlaska Pipeline. We should be getting gasoline for 10 cents like Iraq and Venezuela."

They have a socialized oil economy. we have the free market, we pay the global price .... and thank God for that.

[eeriegeno]

Government intervention in the free markets is a risky proposition. There are always unexpected residual effects. Should the opposition successfully divine the next intervention -- and act accordingly -- then the house of cards will come down at a more rapid rate than currently sustained.

That's just plain horseshit... While I am a staunch conservative who voted for GW twice, the house of cards that is soon to come down is that one from Crawford, Texas. GW has done nothing, absolutely nothing, to slow the rising price of crude. Since Jan 1 the price of world crude has gone from $43.40 to near $70 per barrel. The first that I heard that he was doing something was tonight when he said that some SPR would be released to offset the Katrina loss. People are not going to be satisfied with $3+ dollars a gallon when less than 9 months ago the price was near half that? Storm, or no storm, GW was asleep when the prices were climbing! Now it has bit him where it hurts.......

Same thing with border security, and it will bite him sooner or later.......

[Alberta's Child]

Government intervention in the free markets is a risky proposition.

Releasing oil from the SPR isn't exactly "intervention" in the free markets, since it is being driven by a short-term crisis brought about by a major natural disaster.

[RightWhale]

I know. Those of us who built the TransAlaska Pipeline and didn't draw union wages because we weren't that well organized at the time should in fairness get our gasoline for free.

[Thumper1960]

One of these days, Bush and the Republicans will grow a backbone, stand up from their haunches and begin to fight the domestic terrorists in our midst---the enviros and closet anti-American leftists, better know as public interest analysts.

Why it hasn't been declared a point of national security to open new refineries; re-start nuclear power plant construction; drill in those areas that promise to produce oil for domestic use and suspend and abrogate environmental "acts" that impede energy production, I cannot fathom.

Why Bush hasn't the gonads to issue executive orders, is yet another mystery for historians to ponder......if we survive this road past Hell.

[liberallarry]

So far, Bush is doing and saying the right things. Releasing crude to refiners who need it buys time. And the President has said that government can provide only a limited amount of help and almost none in the immediate future.

None of this has caught any leaders by surpise. There simply was nothing that could be done - either practically or (especially) politically. People weren't - and aren't - willing to believe the nature of the crisis we face and therefore aren't willing to bear the pain of adjustment. Since natural laws can't be mocked or avoided the pain will be all the greater.

Those who compare our current situation with previous "bubbles" are in for a rude shock, I think. Oil - unlike tulips - is an absolutely vital commodity and all indications are that there simply is not enough to meet current demand and the future will only make the situation worse. That means demand will be cut the hard way - depression, war, etc.