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Monday, March 21, 2011

Price of Oil Increased Today -- What's Driving the Price?

Commentary only; not about the Bakken.

What's driving the price of oil? This is a multiple choice question; there are no wrong answers. 
One can make an argument for any one of the four, along with the US gradually ending its own domestic drilling program:
  • Offshore Alaska -- decreasing production and new fields out of the question
  • Onshore federal lands: bureaucratic delays in issuing permits
  • Onshore non-federal lands: lawsuits to prevent development
  • Gulf of Mexico: permitorium continues
  • Converting 40% of corn (food) to ethanol
My hunch: unrest in the Mideast spooked the market but once that settled down, the fact that Japan is now acknowledging that it will need to increase the use of oil, natural gas, or coal; and China will need to do the same if they don't bring their nuclear reactors on line have both replaced the Mideast issue. (I am in the minority on this; pundits say it is the "western bombing on Libya." Remember, the max amount of oil taken off the market due to this is 1.5 million barrels/daily and that all went to Europe; and some feel it is closer to less than a million barrels/day.  North Dakota, alone, is producing 350,000 bbls per day.)

But short term, the story that the Japanese government is asking its refiners to increase production speaks volumes:
Japan’s government is pursuing a number of emergency measures to deal with fuel shortages that include shipping 38,000 kl (about 10,000 gallons) of oil products by sea from refineries in Hokkaido and western Japan to the Tohoku region, hard-hit by the recent earthquake and tsunami.

Minister of Economy, Trade, and Industry Banri Kaieda called on the Petroleum Association of Japan (PAJ) to implement the emergency steps after earlier urging oil distributors to release 1.26 million kl for supply to the market.

Kaieda also called for the operating rates of refineries in western Japan, which stand at around 80%, to be raised to at least 95%. 
Increasing refinery operating rates from 80 percent to full capacity is remarkable. 

Nordic American Tanker sent a letter to its shareholders with the following paragraph (this link is dynamic and may break):
(On Japan) As far as the impact on our industry goes, it is too early to tell, but if nuclear power becomes less attractive, then it is reasonable to assume that the demand for other energy sources such as oil will increase..."
Meanwhile, from Washington, I get a sense of "business as usual":
  • A trip to Brazil (I still don't know why) [Update: here's the reason]
  • Weekend radio addresses on education reform
  • Supreme Court agrees that list of banks receiving bailout dollars must be released
It's very possible it is "business as usual," and maybe by the end of the month, things will be back to normal. But as I list the issues above (at the top of the page), one certainly gets a feeling of things running faster than normal (I didn't even mention the undeclared war on Libya -- 124 Tomahawks and counting; $100 million in missiles alone, so far).

I hope the price of oil doesn't get to $110. It will be blamed on speculators.

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