Persistent strength in the price of oil has once again unleashed maximum nonsense about the influence of speculators. Yes, it’s painful that oil never returned to earth after its 2004 repricing. But, in the search for an explanation, substituting the arcane for the obvious will not help; speculators did not create several years of flat to falling global oil production. Furthermore, as oil made its way from below $25.00 to its new level at $100.00, more of the world’s cheap oil from old reservoirs was swapped out for the new. Given that this new oil is much harder to extract, the world economy is lucky that oil remains so cheap. $100 is a bargain.
In the United States, where the economy has barely recovered (if at all) from the 2008 financial crisis, oil consumption remains weak. With punk demand at home, however, we are instead using our newly spare refining capacity to turn oil into oil products, which we then export. In just two or three years, the US has doubled its export of gasoline, distillate, and diesel especially. Here is a chart through the latest reporting week in May, denoted in million barrels.
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Global demand for diesel — the go-to oil product and the hands-down favorite of the developing world — continues to pull the complex forward. To gauge this demand on a daily basis, I have long suggested following the price of Gasoil. This distillate benchmark reveals the pulse of demand more accurately than West Texas Intermediate crude oil, as its a gateway to both industrial use of oil and also to diesel.
When China experiences drought and reduced hydropower, and is already up against maximum coal capacity, it reaches for distillate. We have seen this as well in post-Sendai Japan: Reduced power generation from its nuclear grid has sent Japan scrambling for coal, LNG, and more distillate. This is one of the reasons why oil inventories in Asia (and also Europe) are dropping hard this year.
In the two graphs below, we see Total Oil Inventories in OECD Europe and Asia have fallen below five-year averages. It’s not a mistake that Gasoil has been trading in a band around $1000 a tonne, or that Brent crude oil remains stubborn at $110.00 per barrel. The loss of Libyan oil combined with the demand shocks out of Asia – Japan’s post earthquake and China’s drought and automobile adoption – are the obvious explanations for oil’s current price.
The effectiveness of speculative price amplification only takes place in timeframes that have little to no effect on consumers. Hardly anyone paid $148.00 for oil in the summer of 2008, just as hardly anyone paid $34.00 for oil in early winter of 2009. Societal fears about the effects of speculators on price have been alive since the time of Cicero (see A Famine at Rhodes). The average price of oil in 2008 was $99.67; the average last year was $79.48; and this year the average so far is $85.00. Those are the prices we pay.
It is depressing that the US government -- and the Obama administration, which has done nothing to downshift our dependency on the Auto-Highway complex -- has also joined the speculation over speculation. Consumption growth rates among the 5 billion people in the developing world have been soaring for a decade. Global costs to extract new oil have doubled, and tripled. Watching the President serve up the tired narrative that speculators have driven the price of oil should dissuade optimists from thinking the US public is ready to face up to reality.