Michele Bachmann Promises $2 Gas: Whether Her Plan Would Create Another Great Recession

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 |  Includes: CRUD, DBO, DNO, DTO, OIL, OLO, SCO, SZO, UCO, USL, USO
by: Devon Shire

I’m Canadian and I live in Canada. Yet most of the television programs I watch are American. The sports I watch are mainly American (hockey being the obvious exception), and the movies I watch are American. So it isn’t hard to keep up with the goings on in the United States. I’m fully up to speed on Brangelina and with American political races.

While I was recently watching television I was pretty sure that I heard Michelle Bachmann suggest that if she became president that she would bring back $2 gasoline for the American motorist. I thought that was too ridiculous for even a politician to suggest, so I fired up the computer and sure enough there was the quote from here in this article. She might as well have promised to make it rain delicious donuts, in my opinion.

Bachmann went on to point the finger at Obama, suggesting that he was someone to blame for gas prices rising from $1.79 when he was elected to $3 plus today. I’m not a big Obama fan or anything like that, and I understand the need to say some things to help yourself get elected, but shouldn’t Bachmann have at least a little concern for her own credibility? When Obama was elected and gas prices were $1.79, it was the middle of the worst recession most living Americans have ever seen.

Perhaps we should be slapping George W. Bush on the back and saying great job on creating the terrible recession that still has hundreds of thousands of Americans out of work ! It worked wonders for lowering oil prices. Is that going to be Bachmann’s plan for lowering gasoline prices again? Create massive unemployment and a giant recession?

Of course the truth is that there is no way an American politician could ever have enough tools at his/her disposal to drive the price of oil back to where we would all love it to be because oil is a global commodity. Oil produced in any part of the world can be transported to a demand source that needs it. While the United States is by far the largest consumer of oil on a daily basis, there are billions of people in emerging economies whose thirst for oil grows every day.

Further, the country that is going to control oil prices for the foreseeable future is not the United States, it is Saudi Arabia. We all witnessed that during the terrible recession that Ms. Bachmann seems to have forgotten. The shock from the drop in economic activity initially created a surplus of oil in the global market. This cratered oil prices in the late fall of 2008 as the price fell into the $30s. OPEC (Saudi Arabia) acted swiftly in late 2008 and took roughly 4 million barrels of production out of the system. Less than 6 months later, oil had rebounded back over $70, which used to be considered a painfully high oil price. Saudi Arabia has the willpower and obviously the oil production to keep oil prices in a range that is viewed as appropriate. Unless Ms. Bachmann gets the Saudis to sign on as a new American state, she isn’t going to alter the balance of power in the oil market.

By the time Obama’s first term is over, I think oil prices and the price of gasoline are likely to be the foremost topic of conversation. The numbers that the IEA is presenting in its monthly oil market reports (here) paint a pretty bleak picture for those who take the time to pay attention.

Two tables from the IEA tell the story. Below is table #1 it details total world oil supply. Note that the most recent quarter was 87 million barrels per day and the highest number is just over 88 million barrels per day.

  • Q1 2010 – 86.5 million barrels per day
  • Q2 2010 – 87.0 million barrels per day
  • Q3 2010 – 87.7 million barrels per day
  • Q4 2010 – 88.2 million barrels per day
  • Q1 2011 – 88.4 million barrels per day
  • Q2 2011 – 87.2 million barrels per day

Table #2 is total world oil demand. The table presents both historical and projected demand. Note that the global demand for Q3 2011 is going to be roughly 90 million barrels a day. Remember that the most recent quarterly global production was 87 million barrels per day. The Saudis have increased production by about 1 million barrels per day since Q2 which means globally we are almost 2 million barrels per day undersupplied and are eating into global inventories. That is why the price of Brent crude has been $20 over WTI.

  • Q1 2010 – 86.8 million barrels per day
  • Q2 2010 – 87.2 million barrels per day
  • Q3 2010 – 89.1 million barrels per day
  • Q4 2010 – 89.9 million barrels per day
  • Q1 2011 – 89.0 million barrels per day
  • Q2 2011 – 88.0 million barrels per day
  • Q3 2011 – 90.0 million barrels per day
  • Q4 2011 – 90.8 million barrels per day
  • Q1 2012 – 90.8 million barrels per day
  • Q2 2012 – 90.0 million barrels per day
  • Q3 2012 – 91.5 million barrels per day
  • Q4 2012 – 92.0 million barrels per day

It isn’t good that we are undersupplied by 2 million barrels a day currently. However, focus now on the oil demand graph for late 2012. Projected oil demand up to 92 million barrels per day. Again, current production is likely around 88 million barrels per day.

I don’t think anyone who follows the oil market thinks that even Saudi Arabia has 4 million barrels of additional oil production that they can draw on to make up this shortfall.

I’d suggest you don’t listen to empty promises from politicians and instead listen to what the IEA is quietly telling us and position your portfolio to profit rather than suffer. There is an oil spike coming and it appears destined to land just in time for the next presidential election.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.