The fuel price game

According to the Short-Term Energy Outlook published monthly by the U.S. Energy Information Administration (EIA), spot prices for crude oil and petroleum products increased for the third consecutive month in May. Now the EIA is forecasting average annual diesel prices of $2.40/gal. for 2009 and $2.67/gal. for 2010. Compared to the $3.80/gal. for diesel in 2008 and the $2.88/gal. in 2007, that still

According to the “Short-Term Energy Outlook” published monthly by the U.S. Energy Information Administration (EIA), spot prices for crude oil and petroleum products increased for the third consecutive month in May. Now the EIA is forecasting average annual diesel prices of $2.40/gal. for 2009 and $2.67/gal. for 2010. Compared to the $3.80/gal. for diesel in 2008 and the $2.88/gal. in 2007, that still doesn't look too bad.

Oil consumption also fell compared to 2008, although that decline is expected to moderate in response to the expected improvement in the global economy. Perhaps in anticipation of that returning demand, OPEC (Organization of the Petroleum Exporting Countries) oil production actually increased in May by 300,000 barrels per day, after falling steadily in the months prior.

This should all spell good news for oil-importing countries like the U.S., right? According to some industry observers, it is good news indeed. “With the recent increases in crude oil prices, the drumbeat that we're on our way back to $100-per-barrel oil has been growing louder,” noted John Kingston, global director of oil for Platts, in the company's recently published oil survey. “But [the May] surge in output shows that OPEC has lots of productive capacity that it can bring on the market relatively quickly, and that should certainly prove a hurdle to any move back to three-digit oil prices.”

Not everybody shares Mr. Kingston's confidence, however. “Bust and Boom,” a May 22 article in The Economist, for example, offers up some of the reasons for continued concern, including:

  • Much of the world's “easy” oil has already been extracted or is in the hands of nationalist governments that will not allow foreigners to exploit it.

  • New reserves tend to be in ever more inhospitable and inaccessible places, and take more time and more money to develop.

  • The oil industry is short of equipment and workers to get the job done.

  • And finally, the recession has only interrupted the growth in demand, especially in emerging markets.

These factors lead to a rather less rosy conclusion. “So when demand begins to revive,” The Economist article notes, “a sharp rise in prices is inevitable. That does not mean that a price spike is just around the corner, however. The speed with which it arrives will depend on the strength of the global recovery….”

In addition to these core issues, there are also some of the potentially wildest “wild cards” you ever saw tucked here and there in the energy deck. Draw one or two of these and it could be a whole new game virtually overnight. For starters, there is the Hurricanes-in-the-Gulf-of-Mexico card. This annual risk to domestic oil production is calculated every year by EIA.

Its “2009 Outlook for Hurricane Production Outages in the Gulf of Mexico” was released in May, just ahead of the official start of the Atlantic Basin hurricane season. Based on the results of a hurricane outage simulation using the National Oceanic and Atmospheric Administration's most recent predictions, EIA offers “a 3 to 4% probability of offshore crude oil or natural gas production experiencing outages the same as or larger than last season when Hurricanes Gustav and Ike struck the Gulf Coast…”

Wilder still is the catalog of other possible causes for supply disruption, including political conflict in the Middle East or other primary oil-producing regions, which results in damage to oil wells and delivery modes or perhaps punitive oil embargoes from key global suppliers. These are wildcards, after all, so who can know for sure?

My own best bet is that savvy fleets, no matter what, will hold the fuel-conserving cards they captured in 2008, just in case.

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