By Paul Ausick and Douglas A. McIntyre, 24/7 Wall St.
The price of gas is a widely covered news item these days. Oil prices have moved up from $75 a barrel in October of last year to more than $100 a barrel currently. And the trend continues to point toward even higher oil prices. Of course, along with the price of oil, gas prices have also risen, almost in lockstep.
The price of gasoline today is 10 percent higher than it was just two months ago. The average price for a gallon of regular is almost $3.62. Gas prices in January have been the highest ever recorded price for that month. Many economists and energy analysts believe a rise to $4 a gallon is inevitable. But their estimates could be grossly understated. Gas will reach $5 a gallon before the end of the year.
Two warring trends are pushing and pulling gas prices. On the one hand, Americans now drive less than at any time in the past 11 years. On the other hand, gasoline and oil inventories are at very low levels around the world, and traders believe that supply will tighten significantly. The fact that Americans drive much less will not offset an interruption of supply from the Middle East, a decision by refineries to charge more to turn oil into gasoline, or higher demand from emerging economies like China and India.
24/7 Wall St. reviewed the major reasons that gas prices have risen in the past quarter and analyzed whether the causes will improve or worsen. We have estimated how much each factor could increase gas prices. Together, those increases would be enough to push gas prices up by another $1.50.
1. Strait of Hormuz
About 20 percent of the crude oil produced in the world is shipped through the Strait of Hormuz, and Iran has threatened to shut down shipping traffic through the Strait. At its narrowest, the passage is 30 miles wide, so there is a realistic case that a conflict could close it. Iran has already been isolated as a trade partner by U.S. and EU sanctions. The regime in the country has made a number of threats about what it might do if its “national interests” were threatened. If Iran follows through with its threats, the period the passage is closed could be very brief if the U.S. Navy, which has a carrier group in the region, moves to reopen the lane. But it is not clear that the American government would make that decision without the open support of allies or the United Nations. A closure of the passage, or any escalation that would make a closure more likely, will drive oil prices higher — and by extension, gasoline prices.
Iran contributes to a second problem in terms of global oil supply well beyond that of its ability to interrupt supply. Because of the embargo against the nation due to nuclear weapons violations, the U.S. has pressured large oil importers such as Japan to act to isolate Iran by cutting their imports. This puts Japan in a position in which it has to tap even tighter global supply. Japan apparently has agreed to cut its Iranian crude imports by 20 percent. But as the world’s third largest oil importer, Japan indeed will have to get its oil somewhere other than Iran — which will put more pressure on current production.
3. Refiners raising prices
Most of the oil refined on the east coast of the U.S. is Brent crude, a type of oil produced from the North Sea. The price of Brent — more than $124 a barrel — is almost $16 higher than the price of West Texas Intermediate (WTI) crude, the amount most people read about in the media. But because Brent has replaced WTI as the global price benchmark, U.S. refiners set prices for gasoline and other products as if Brent were the only grade of crude used. That allows refiners with access to cheaper WTI to make larger profits.
However, when the prices converge, as happened in the final two months of 2011, WTI refiners lose their edge — and their hefty profits. “Refiners were losing money in November and December. You can only lose money for so long,” John Felmy, chief economist for the American Petroleum Institute, recently said. Many large refineries are owned by public companies that do not have much appetite for posting ongoing losses. To avoid losses, refiners will have to increase gasoline prices.
4. Other geopolitical risks
Iran does not present the only geopolitical challenge to oil production. In Nigeria, which is the 14th largest producer of oil in the world, Islamic terrorist group Boko Haram has continued to attack Christian areas of the country. The Nigerian Army has reacted by attacking Islamists. Militants have continued to attack pipelines, apparently in a move to disrupt the government.
Meanwhile, there are concerns about supply even from Venezuela. Venezuela is the world’s 11th largest producer of crude. The regime there has been fairly stable under the 13-year reign of Hugo Chavez. But Chavez is due for a second cancer surgery later this month. The Miami Herald recently wrote that “some analysts question his ability to hold onto the presidency through the current election cycle.”
Other parts of the Middle East and Africa are also in turmoil. Analysts recently mentioned Bahrain, Libya, Iraq, Nigeria and Yemen as political flashpoints. “The world faces oil supply risks from a multitude of sources, not only in the Middle East but also in Africa. In our view, not since the late 1970s/early 1980s has there been such a serious threat to oil supply,” Soozhana Choi, Deutsche Bank’s head of Asia commodities research, said in a note to clients recently. All these flashpoints translate to further concerns about oil supply. And when oil supplies are tight, the price of oil — and gasoline — increases.
5. The EU may save itself
For now, Greece has been bailed out again — a move that should buoy confidence in the region and encourage demand for oil. Even with the Greek bailout, however, the eurozone is not out of the woods as nations continue to implement austerity measures to protect against the risk of default on sovereign debt.
While some experts believe the risk of defaults in the region is overblown, several economies in the eurozone continue to be in trouble. According to a recent European Commission forecast, the eurozone GDP will contract 0.3 percent, driven in part by deep recessions in several southen EU nations, including Spain and Portugal.
Either way, deepening financial and economic trouble in Europe would drop demand for oil there. However, if leaders in the region can settle on mechanisms to protect nations with financial problems from default, national budgets will not be cut to extraordinarily low levels — levels that would otherwise kill both consumer demand and business demand for oil.
6. U.S. economic recovery
An improved U.S. economy means higher oil prices. U.S. GDP, employment and even housing have all staged unexpected improvements in recent months. Many economists now peg a 2012 GDP increase at more than 2 percent. The new White House budget assumes growth of 3 percent by 2013. An average of more than 100,000 jobs has been created in each of the past six months. And an extension of payroll tax cuts through the end of this year may further aid the employment recovery. An extension of unemployment benefits means that hundreds of thousands of American who would have no income, will have at least enough to consume basic goods and services. The argument that Americans now drive less is not a powerful one for gas and oil demand when a healthy economy also means more consumption of oil for business, petrochemicals and jet fuel. Demand for oil-based products across the entire economy will pick up with any recovery.
In the U.S., summer vacation driving has historically boosted demand for gasoline. Over the past three or so years, however, that boost has been small, if present at all. In 2011, U.S. traffic volume decreased year-over-year in every month except January and February. But that was last year. So long as the U.S. economy continues to improve, more drivers will be on the road this summer.
8. Supply risk
In December 2011, OPEC members produced nearly 31 million barrels a day, cutting the cartel’s spare capacity capability from 3.18 million barrels per day to 2.85 million. Saudi Arabia accounts for 2.15 million of those daily barrels of spare capacity.
Whether this data is accurate is arguable. What is not arguable is that starting to pump the spare capacity will take time, which will not be very helpful in the event that the Strait of Hormuz is closed or some other geopolitical risk is realized.
Then there is Russia, the world’s first or second largest producer, depending on which day you look at the data. The OECD is counting on Russian production to make up for some of the short supplies and to grow by 1.4 percent to 10.72 million barrels a day in 2012. Russia grew its production by 1.2 percent in 2011. An additional gain of 17 percent in 2012 could signify that the OECD is hoping that Russian production can grow even more. There is no guarantee that Russia will deliver.
Supply from Canada, the U.S., Australia and Brazil is expected to rise in 2012, though North Sea production is expected to fall. The OECD estimates global demand in 2012 of 90 million barrels a day and global supply essentially equal to projected supply. Nothing about that state of affairs should lead anyone to a conclusion that prices will fall.
Kabul (CNN) — The Taliban claimed responsibility for an attack Saturday inside the Afghan interior ministry that killed at least two American officers.
NATO and Afghan officials reported the deaths of two American officers inside the ministry in Kabul, prompting Gen. John Allen to order all military advisers with the International Security Assistance Force to withdraw from government ministries in the Afghan capital as a safety precaution.
According to ISAF, initial reports indicated that “an individual” turned his weapon against NATO service members. The agency did not provide the nationalities of the victims, but an Afghan police official confirmed they were American.
The two officers were found dead in their office from gunshot wounds to the head, the Afghan official said.
“I condemn today’s attack at the Afghan Ministry of Interior that killed two of our coalition officers, and my thoughts and prayers are with the families and loved ones of the brave individuals lost today,” said Allen, the ISAF commander.
“The perpetrator of this attack is a coward whose actions will not go unanswered,” he added.
A Taliban spokesman said the attack was in response to the recent burning of Qurans at a U.S. base.
“The attacker is still alive and resisting and a second Mujahid managed to escape the ministry,” Zabiullah Mujahid said in an email. “This comes amid our call to all Afghan security forces to turn their guns towards the invading forces who are the real enemies of our country and religion and kill them so they leave our country.”
So I would anticipate the peace/truce talks with the Taliban are on hold indefinitely; and appropriately so.
The Syrian military pounded the Baba Amro district of Homs for the fourth week on Saturday as the International Committee of the Red Cross (ICRC) sought to evacuate distressed civilians from the city.
At least 52 people were killed in Syria on Saturday, including nine in Homs, Syria’s third city, according to the Syrian Revolution Council.
The state news agency SANA reported the funerals of 18 members of the security forces killed by “armed terrorist groups” in Homs, Deraa, Idlib and the Damascus countryside.
Deploring the outcome of an international “Friends of Syria” conference, opposition activists said the world had abandoned them to be killed by forces loyal to President Bashar al-Assad.
“They (foreign leaders) are still giving opportunities to this man who is killing us and has already killed thousands of people,” said Nadir Husseini, an activist in Baba Amro.
“Negotiations have resumed with Syrian authorities and the opposition in order to continue evacuating all persons in need of help,” the ICRC spokesman Hicham Hassan told Reuters.
“We hope to be able to carry out many more life-saving operations,” he said. “We are hopeful the ICRC will also enter Baba Amro today.”
Red Cross and Red Crescent ambulances entered the besieged Homs district of Baba Amr on Friday and evacuated seven Syrians wounded in shelling by regime forces as well as 20 women and children.
But the ambulances did not evacuate two wounded Western journalists and the bodies of two others, a spokesman for the International Committee of the Red Cross told AFP.
“Three ambulances entered Baba Amr and they have left. They evacuated so far seven wounded Syrian citizens,” Saleh Dabbakeh said.
Negotiations for the entry of further relief convoys were to resume early on Saturday after breaking off for the night.
By Al Arabiya with agencies
A suicide car bomb claimed by al-Qaeda killed at least 26 people outside a presidential palace in southern Yemen on Saturday, hours after cwas sworn as Yemen’s new president with the job of bringing stability to an increasingly chaotic nation.
The car was driven at a palace in the port city of Mukalla, Yemen’s fourth-largest city, far from the capital Sana’a where Hadi was sworn in. Dozens were injured, and the governor of Hadramout province said most of the dead were members of the national army, the Republican Guard.
“Al-Qaeda is responsible for the suicide bombing in Mukalla in retaliation for the Republican Guard’s crimes,” an al-Qaeda source told Reuters.
Sana’a, scene of much fighting in recent months between factions of the army supporting protesters and units loyal to former president Ali Abddulah Saleh, was relatively quiet, however.
After taking the oath, Hadi had singled out al-Qaeda, whose active Arabian Peninsula branch is based in Yemen, as a top priority for his new administration: “Continuing the war against al-Qaeda is a national and religious duty.”
Saleh, who arrived back in Sana’a from medical treatment in the United States earlier Saturday, is to formally transfer the reins of power in a ceremony at the presidential palace on Monday.
The handover will put the seal on a hard-won November transfer of power deal, under which Saleh agreed to step down in return for a controversial promise of immunity from prosecution over the deaths of hundreds of people during 10 months of protests against his 33-year rule.