Getting prepared

Suddenly the weather is changing into summer, schools and universities are approaching the end of the teaching year, and thoughts turn to the summer vacation. The world, to a great degree is prosperous, and so cars will drive, planes will fly and there is no immediate blot on the horizon to expect that this might not be a very pleasant three months.

For, this time, there will be enough gas to fuel the travel. Prices may be up a little but with the world producing oil as fast as it can, a short term surplus of supply has developed, as reported by Petroleum World. Iran's OPEC governor has pointedly remarked that the world is presently more than comfortably supplied with oil. At the same time stocks have been built up to the point in the US that
US crude stocks rose by 2.6-mil barrels to 327-mil barrels in the week to Apr 29, the highest since the end of March 2002, the DOE said. Inventories in the critical Cushing, Oklahoma, region, the delivery point for the New York Mercantile Exchange's futures contract, climbed by 600,000 barrels to 22.78-mil barrels, leaving about 2.2-mil barrels of storage space free.

"Inventories are getting to the limit of their capacity," Kazempour said.
So, at the start of the season we have the world producing oil just about as fast as it can, and with a reserve in place about as large as it can possibly be. The combination should, no doubt, get us through August and into the fall.

We are however falling into the territory of the speculator. At this point no-one is anticipating that the supply will fail to match demand before some time late in the fall. Yet prices have not come significantly down. The reason comes with the growing awareness that this is a problem that is not going to go away. Yes it is true that this topic hasn't got the rivetted attention of the politician or the press on a consistent basis (though stories are now bubbling up with more frequency in the same way that they are beginning to take hold in blogistan). But it has caught the attention of the investing class. And since no-one is offering a solution to the approaching shortfall, it does not take a rocket scientist (grin) to realize that there is a significant ROI on its way and to plan accordingly. Which likely will mean that the price will go up faster than currently anticipated, and also higher.

Which might suggest, for those planning a vacation, earlier in the summer might be better than early in the fall.

Technorati Tags: ,

Good points. But --

Domestically, the flash point is consumer confidence. Most likely scenario: by July 15, drivers watching prices creep up stop a lot of their driving, and stop a lot of their buying. Markets nosedive in response.

Internationally, the flash point is Iran, in early June. We ARE going to bomb their nascent nuclear facilities. When that causes other Arab nations to stop shipping oil, in protest, we will find our economy unravelling. There is no wiggle room. No extra tankers, refineries, wells.

My bet is the Iran imbroglio will severely disrupt international oil shipments before July 4th.

In either scenario, reduced domestic consumer response will drive markets way down.

If Iran is attacked, the gates of Hell will truely open. The US faces a massive defeat if it happens. Iran's land-based anti-ship cruise missiles would decimate the US fleets and might even target Saudi oil facilities. Take a look at the Persian Gulf's geography--there's a reason it's called the Persian Gulf. Iran also has an airforce. It's also very probable that it has signed secret defense treaties with China and/or Russia. No, the people controlling Bush aren't that stupid; their interests would be devastated.

As for the summer vacation ritual, it should be noted that it's a class thing--the majority of US citizens can't take one because they MUST work. So, what we're talking about is how will the top 35-40% of households be affected by rising fuel and energy prices viz their vacations?

Given the additional debt load some have taken, I would think them unlikely to take an extended vacation, if any at all. IBM's laying off 15,000, and other companies are taking smaller, less publicized, steps, which will cause some to accrue their vacation pay to be used in lieu of, or supplemental to, severence pay. So I think the overall numbers taking traditional summer vacations will be less than average this year regardless of fuel prices.

People may also choose to use campgrounds instead of motels as a way to stretch dollars for fuel or to plan shorter trips. How it all pans out will be of interest where I live on the Oregon coast, which is a prime tourist/vacation region.

>>If Iran is attacked, the gates of Hell will truely open. The US faces a massive defeat if it happens. Iran's land-based anti-ship cruise missiles would decimate the US fleets and might even target Saudi oil facilities.

You don't even have to look as far as Iran or OPEC retaliating--the US attacks, Iran shuts off their approx. 4 million barrels/day of exports, and the world markets descend into chaos.

Iran is just as intractable a mess as North Korea, although for different reasons.

I only hope someone near Dub has the brains and the balls to tell him. I know--Colin Powell told Dub pre-Iraq invasion about the "Pottery Barn rule" (you break it, you bought it), and he didn't listen. Hopefully this time he would show more intelligence than a bag of rocks and avoid another debacle.

I'd say the chances of the US attacking Iran are at least 50-50.

Not that I'm not worried in the near term, but I do not think chaos is on the horizon for the summer. We will not attack Iran, they will not cut off supplies. SUVs will roam the countryside consuming precious fuel that could be put to much better use in preparing for the inevitable spike in prices.

I'm much more worried about the chaos of high oil prices on the foreign policies of China and Pakistan, both heavily armed nuclear states.

Domestically, we should try to encourage the demand destructions as the authors of this site rightly argue for. We should also increase inventory capacity to buy now while prices are lower (hoarding may become a problem though).

I also don't think that we will see much excitement this summer. The crisis will more likely evolve slowly but inexorably (my Canute analogy) rather than with the sudden arrival of a tsunami.
That of course presumes we don't get a "Wag the Dog" event. And there I suspect that the presence of China in the background might give pause.

my bet is that this summer will be a continuation of the spring. Oil prices that creep up steadily and then plateau until the consumer base is used to it. I think that there is about a $0.60-0.70 rise in price that our economy can stomach, and the majority of middle class can handle. We say we'll bitch about $2.50 to $3.00/gal gas, and demand action from our representatives, but how loudly will we really?

My predictions:
A few people will start to carpool to work together.

A few people will start to take public transportation.

A few op-ed pieces will make the papers, demanding a "real" energy policy.

80% of the country will continue to go along with their heads in the sand, and puting their gas on a credit card instead of paying cash.

Get real, which do you think the "average" American thinks more about, the price of gas, or whether or not the Runaway Bride's husband will take her back.

Unless there is a disruption in supply, or the prices go up more than 20 cents in a week, no one will notice... until the fall when the high gas prices remain from the summer and the fuel oil and gas bills for heating start to come in.

If Dubya can navigate gettingthe draftfired up again, then I think the attack on Iran becomes a possibility. Otherwise, there aren't sufficient forces to hold what we have, much less go after Iraq.

Of course, if the Israelis are going to play their cards, who knows what our two leaders could decide.

Outside of that, if Taiwan happens to come into the picture because China is feeling her oats, and we piss them off...well, let's just say that their ability to sell our IOU's could drop the dollar through the floor and truly cause a depression.

Otherwise, it will be a slow creep of oil prices, while the policy wogs intone "There is no oil supply problem - look at our inventory numbers!" There may even be a retreat in oil price - but that will only make things worse, as it will slow drilling and investment in the very projects that might alleviate the slope of the slide...

Interesting article in the "Arab News" which makes a good case that oil is currently very underpriced.

That oil is underpriced is also Matt Simmons argument.