Weekend: $104 Oil Should be No Surprise

Written By Nick Hodge

Posted March 5, 2011

Welcome to the Energy and Capital Weekend Edition — our insights from the week in investing and links to our most-read Energy and Capital and sister publication articles.

When the family starts asking about oil, I know it must be on the minds of most others around the country.

Here’s the e-mail I received from my sister this week:

What is going on with theses gas prices? What is your take on them?
Yes, I do know I’m going to get a long-winded explanation.

And my response, which I thought was worth passing along…

In a nutshell: There’s simply not enough

Gas is going up for several reasons.

It started with the unrest in Tunisia and Egypt last month and the month before.

But neither of those two countries produce much oil. Egypt is home to the Suez Canal though, through which lots of oil travels in ships.  When they closed the canal because of the protests, the price of oil went up.

It’s a supply and demand thing. Investors thought supply would be hindered because no oil would get through the Suez, so they bought more of it. And when everyone is buying oil (or any commodity), the price goes up. 

Then Libya started rioting. And Libya actually produces a lot of oil — about 1.6 million barrels per day. (The world uses something like 86 million barrels per day.)  Now that Libya is on the verge of civil war, their oil fields are being shut down. Not only that, but Gaddafi (the head of Libya) has threatened to bomb his own oil fields. 

The threat of losing 1.6 million barrels per day of world supply has traders going crazy, buying all the oil they can. So the price has gone from $85 per barrel to over $100 per barrel in the past few weeks. 

Gas prices follow oil prices, so they’ve risen as well. 

It’s like crack in the ghetto: When there’s enough supply, prices are low. But if supply drops (or demand increases) the price goes up. 

A few more things at play…

We’re entering summer driving season, when oil refiners have to switch to a different, more expensive blend. In the winter they can use a cheaper blend because of EPA pollution laws; when they switch, they pass on the higher costs. 

Also, we’ve basically been in an “oil crunch” for three decades, ever since the Carter administration.

The theory is that we’re running out of oil. As I said, we use about 86 million barrels per day… If the world keeps growing at its current rate, forecasts say we’ll be using over 110 million barrels per day by 2030.

Most oil engineers say we’ll never be able to produce that much. That’s basically the reason behind everything green and every time you hear someone talking about our ‘foreign oil addiction’. 

In a nutshell, supply is very tight. We barely produce enough to cover global oil demand as it is. So whenever there’s a disruption — or even threat of a disruption — prices go up. 

In one sentence: There’s not enough oil.

It’s not all bad if you know what’s going on, though… You can buy oil stocks and funds that track the price so you’re actually making money as the prices rise. 

If that’s not clear, let me know.

Lastly, I used that Dremel tool the other day in the bathroom to get the grout out from between the tiles. I bought a diamond blade for it and it cut right through the stuff. So thanks for that.

Oh, and make sure you check out the recap below.

Call it like you see it,

Editor, Energy and Capital

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