Fresh headlines over the weekend could portend another difficult week for oil bears (present company included). Gaza-Israel violence along with new protests in Tahrir Square against the military could incite another buying frenzy in the market. Keep in mind, the Egyptian military was lauded for staying out of the fray regarding the overthrow of Mubarak. They might not be so accommodating when it comes to their potential ouster.
At the same time the link between the U.S. dollar and oil re-coupled. Thus, as the dollar tanked to a 15-month low last week, WTI in New York surged by more than 5% and Brent crude oil in London, priced in pound sterling, hit an all-time high of £77.64 a barrel.
To add insult to injury, President Obama’s insouciance to the burden of $4 gasoline on the American everyman was on full display last week in Fairless Hills, PA (a 30-minute drive from where our office is located and site of a once mammoth U.S. Steel facility).
Bottom line, headlines out of the Middle East and monetary policy from the U.S. will continue to encourage higher oil prices. This is why today’s issue of The Schork Report presents the facts to contrast Obama’s ill-informed remarks regarding the rise in oil prices.
According to the White House transcripts of the president’s town hall meeting in Pennsylvania… when asked by a member in the audience regarding the rise in gasoline prices, Obama informed the crowd that most of the reason why prices spiked in 2008 was because “… demand for oil increased”.
We will have to call the president out on this… demand three years ago was most definitely not increasing.
The amount of gasoline supplied to the market in the second quarter 2008 was 1.3% below the corresponding quarter in 2007. What’s more, as illustrated in today’s Chart of the Day, demand as measured by the Federal Highway Administration peaked four years ago… and bottomed three years ago.
To wit, the elasticity of demand for gasoline in the U.S. weakens when the real (adjusted for inflation) cost of gasoline tops $3.25 a gallon at the pump. Above this threshold consumer demand dies.
How can we say this? Because it happened in 2005 when the resale value of a home was $222K and the unemployment rate was 5.1% and it happened in 2008 when you could sell your home for $176K and the unemployment was 5.8%.
Today the average American home is worth only $156K (32% below the 2006 peak) and the unemployment rate is 8.8% (and that is only because the labor force has not grown).
Consumers are suffering as we speak… but the president of the United States has not an apparent clue… and we repeat… when it comes to kitchen table budget talks across the United States, the President of the United States is woefully ignorant.
Obama gleefully jibed the clingers in Pennsylvania for among other things, clinging to their “big SUVs…monster trucks.” As if scooting along I80 in the middle of January in a $40K Chevy Volt makes any sense.
When the president finished sneering, he enlightened the crowd to some peculiar history.
“…here’s a little secret for you. We actually have seen higher oil production here in the United States than any time in our history," Obama informed the crowd.
Really…at any time in our history? What the heck is he talking about?
Thanks in large part to increased output from BP (Thunder Horse) or as the White House likes to refer to them, “British Petroleum,” crude oil output in the U.S. is averaging 5.54 MMbbl/d this year. That is a 12% increase since 2008…. that’s great, thank you BP… er… we mean British Petroleum, for providing this oil.
However, as every peak oiler knows, U.S. oil production peaked in November 1970 at 10.04 MMbbl/d, i.e., 1.8× what Obama apparently thinks is the highest oil production “…at any time…” in the history of the U.S.
This leads us to ask… with such apparent ignorance from the White House, why would you not be buying oil futures?
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Stephen Schork is the Editor of The Schork Reportand has more than 17 years experience in physical commodity and derivatives trading, risk systems modeling and structured commodity finance.