Perfect Storm Causing Oil Prices to Skyrocket
It
is a perfect storm. Very cold Winters in the U.S. and Europe putting
pressure on heating oil supplies and costs, increased crude oil demand
in China, and end of the year reductions in supply are driving crude oil
prices high. It affects us all.
The U.S. Energy Information Administration
and several other reliable sources are forecasting the cost of
petroleum based fuels to skyrocket short-term. The next six months could
see West Texas Intermediate Crude Oil (WTI) reach prices of over $100 a
barrel. Long-term demand is also strong and will continue to put price
pressures on every sector that uses oil.
With
Friday’s WTI benchmark hitting $88.37 a barrel this spells serious
economic pressure on consumers that rely on fuel oil to heat their
homes, as well as transportation companies that bring goods to market.
Really, our whole economy is intertwined with crude oil in some way
whether it is a fuel or an ingredient in materials like synthetic
rubber, plastics or road material.
Very
recent estimates are predicting the cost of crude to rise to $90 a
barrel by January 1, $94 by March, and $106 by July. Given the weather
and demand for home heating oil in the Midwest over the weekend I
predict we will hit the $90 mark in the next week.
There are a number of factors impacting the current crude oil price.
Weather.
The U.S. and Europe are experiencing a very early harsh Winter. Many
consumers in the north use fuel oil to heat their homes. Short-term
demand is stripping supplies which require refineries to shift crude
stocks from other types of products to fuel oil. The price of home
heating oil across New York state has risen 15% in the past month and
currently consumers are paying $3.27 a gallon according to NYSERDA.
If the cold weather holds in U.S. Northern states, this prices could
increase another 25-30% before Winter is over which which would be bad
news for already financially stressed consumers.
Pressure from growing world economies.
China’s economy has started to grow again and is putting substantial
pressure on the the price of crude oil. Given a population of over 1.3
billion, China’s growth is the biggest short and long term driver for
oil. Worldwide demand for oil and gas liquids is over 30 billion barrels
currently and is expected to increase by another 5 billion by 2015.
Value of currency.
U.S. currency is low compared to many oil producing countries so a
barrel of oil in U.S. dollars costs more because our currency is worth
less than those of many oil producing counties.
End of year inventories.
U.S. refineries work hard to reduce their raw and finished petroleum
based inventories at their lowest point in the year which is normally
November and December. Companies don’t want to pay extra taxes for
inventory they are holding December 31, and finally, December is the
time of year when many refineries shut down for several weeks to handle
planned maintenance and upgrades of their systems.
Seven year ban on U.S. deep water drilling.
The recent about face by the Obama administration won’t affect the
short-term costs of petroleum products to consumers but will over the
next 10 years. We need the courts to overturn President Obama's ban.
I
don’t think anyone disagrees that the U.S. needs to decrease its
reliance on oil, and foreign oil in particular, but the valve can’t just
be turned off instantly, especially right now when our economic
recovery is so tenuous. We need the courts to overturn President Obama's 7 year ban on deep water drilling.
Sam Thacker is a partner in Austin Texas based Business Fiannce Solutions.
Direct Email: sam@lesliethacker.com
Twitter: @SMBFinance
