Bill O’Reilly contends that it’s all just an energy company conspiracy, but this week’s price hike for gasoline and crude oil is actually showing just how sensitive U.S. energy markets have become to disruptions that just a few years ago would have barely registered a blip in those markets.
Gasoline and crude-oil and prices surged after the June 20 spill of 47,000 barrels of oil waste snarled the Calcasieu Ship Channel, a major Louisiana waterway that connects the Port of Lake Charles to the Gulf of Mexico. The stoppage stranded oil barges and tugs that are delivering crude oil to three refineries that together refine about 775,000 barrels of crude oil a day into fuels such as gasoline. The Coast Guard reported yesterday that it might open the channel to limited traffic by this weekend.
Primarily as a result, gasoline futures on the New York Mercantile Exchange have risen by almost 15% over the past week to yesterday’s close of $2.29 a gallon, the highest level since the aftermath of last summer’s Gulf Coast hurricanes. Meanwhile, August crude-oil futures rose over $1.30 to $73.52 a barrel, which is about $3 higher since the spill and an 11% increase for the current quarter. The spill is merely the latest in a series of supply disruptions over the past year that have increased average U.S. gasoline prices by almost 25% and crude-oil prices by 15% since the beginning of the 2005 hurricane season.

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Remember those high natural gas prices of last year and the corresponding calls for more regulation of the oil and gas industry?
Well, after a hurricane season last year when prices skyrocketed to above $15 per British thermal unit and stored supplies were slashed as multiple storms played havoc with Gulf of Mexico production and storage facilities, U.S. supplies of natural gas are now so plentiful that the natural gas industry is running out of places to store it. Thus, despite the prospect of another active hurricane season, natural gas prices are down over 40% this year to $6.62 per BTU and likely will move even lower.
Rather than governmental intervention, the primary reason for the declining prices is the weather. As a result of a relatively mild winter, lower-than-expected demand for heating resulted in more plentiful supplies of natural gas this spring. Accordingly, over half of the estimated four trillion cubic feet of U.S. underground natural gas-storage capacity is already being used, which means that those facilities could be at near full capacity even before the first hurricane hits the U.S. mainland later this summer.
Meanwhile, Bill O’Reilly and attorneys general from several Midwestern states — who last year condemned the big oil and gas companies and gas traders for manipulating prices and pushing up home-heating bills for all U.S. citizens — have not yet explained how, with all their market power, those avaricious companies and traders could not prevent the current collapse of natural gas prices.

Amidst the concern over relatively elevated crude oil prices, natural gas prices continued their slump yesterday after governmental data showed volumes in gas storage rose more than expected last week. The news pushed futures contracts for June delivery down to $5.997 per million British thermal units on the New York Mercantile Exchange, the first time that the price for such contracts had dipped under $6 per BTU since February, 2005. Gas futures are now down 47% for the year and 65% below their December high, which was a Nymex record.
The Energy Information Administration reported yesterday that total gas in underground storage rose by 91 billion cubic feet, which is almost eight billion cubic feet more than previous estimates. Volumes in storage as of May 12 totaled 2.08 trillion cubic feet, the highest ever for this time of year. Some analysts are speculating that the U.S. could actually run out of storage space if the current trends continue.
Still no word from Bill O’Reilly on how the big oil and gas companies allowed such a situation to occur.

This post from a couple of weeks ago noted the rise of crude oil prices to over $70 per barrel, and this subsequent post examined the unusually long contango period that has existed in the oil trading markets during the current run-up in crude oil prices.
Well, crude oil prices have now fallen below $70 per barrel again. Thus, Clear Thinkers favorite James Hamilton is wondering whether oil prices have peaked for the time being. One interesting observation in the post is about the impact of $3 a gallon gasoline prices:

These data seem to suggest that the April gasoline price increases may have been sufficient to reverse the usual tendency for the U.S. public to use more gasoline each year than the previous year. Certainly that’s what we observed last fall when gas prices were around their current values, and I see no reason not to expect to see the same thing to be repeated now.

This post from last week noted the seeming contradiction between rising oil prices at a time of rising inventories and the current longstanding “contango” in the oil trading market — i.e., futures contracts for a given product are priced substantially higher than that same product for near-term delivery.
In this post, Clear Thinkers favorite James Hamilton takes a stab at explaining the situation, and casts doubt on the conventional wisdom that speculation is a separate force from supply and demand in affecting the price of oil. In so doing, Professor Hamilton makes the following common-sense observation, which you will never hear from politicians and a mainstream media that prefer to characterize business interests that make money speculating on oil prices as greedy capitalists:

[I]f these speculators turn out to be right [that prices will be higher in the future] and earn themselves a tidy profit, they will have done us all a favor. By bidding up the price of oil today and filling the storage facilities to the brim, they will have caused consumers to conserve today in order to have more oil available in the event that we do run into a big shortfall in production before September. On the other hand, if the speculators turn out to be wrong, they bought high and sold low. That would be destabilizing, forcing us all through some current pain, which, if we somehow could predict the future with certainty, will turn out to have been unnecessary. Our only consolation would be that the speculators will undoubtedly feel our pain, and then some, as their multibillion dollar bets flew into the wastebasket.
So, the only reason I see to be concerned about the contribution of speculation is if you think that the speculators are in danger of making huge losses. But if that’s your concern, I have a simple cure — just put yourself on the selling side of some of those futures contracts — let their pain be your personal gain.

Crude oil closed above $70 a barrel yesterday for the first time despite the fact that U.S. oil inventories are at their highest levels in nearly eight years. Thus, this current price spike appears to be a reflection of a new phenomenon — investment in oil futures driving higher prices rather than the typical principles of supply-and-demand.
The U.S. is the world’s largest oil market, generating almost a quarter of world demand of about 85 million barrels a day. U.S. benchmark oil for May delivery settled at a record of $70.40 a barrel yesterday on the New York Mercantile Exchange, up $1.08 a barrel. Although oil prices are up almost 15% for the year, the inflation-adjusted record price for oil remains the April 1980 price, which equates to $97.21 in 2006 dollars. Yesterday’s price came after the U.S. Energy Department reported last week that commercial crude-oil inventories had risen to 346 million barrels, the highest level since May 29, 1998. At that time, the crude-oil market was about to crash and, by the end of 1998, prices fell below $11 a barrel from an average of over $18 in late 1997.
The seeming contradiction of rising prices and inventories probably is best explained by concern over supply constraints in Iraq and Nigeria and the steadily increasing demand in large countries such as China and India. As a result, investors are flocking to oil markets where it is currently estimated that investment managers are holding between $100 to $125 billion in commodities investments, which compares to less than $10 billion in such investments back in 2000. That level of investment indicates that the market is betting that demand for oil will continue to rise under tightening supplies.
For over a year now, the three-year bull market in oil has resulted in what energy traders call “contango” — i.e., futures contracts for a given product are priced substantially higher than that same product for near-term delivery. As a result, it pays to buy and hold oil now to sell it later at the higher price. “Backwardation” is the opposite of contango and occurs when near-term prices are higher than long-term contracts. That market condition would prompt buyers to dump inventories, which would in turn dampen prices considerably.
For more expert views on the current spike in oil prices, check out James Hamilton (also here and here) and the Oil Drum.

This NY Times article reports on the successful lobbying effort by the oil and gas industry in the mid-1990’s during a time of low energy prices to persuade Congress to create incentives for energy companies to explore for oil and gas in the Gulf of Mexico.
Congress passes legislation to create the incentives, but the legislators don’t bother to read the legislation carefully.
During the current period of relatively high energy prices, the oil and gas companies take advantage of the legislation to make a lot more money through paying reduced royalties to the government than they would otherwise have made without the legislation.
Journalists point this out to legislators.
Hilarity ensues.

As oil prices reversed a downward trend and rose over the weekend on the news of more Nigerian political problems (James Hamilton explains why this is important), the roller coaster of emotions that is the natural gas market continued unabated.
Just over two months after prices hit an all-time high amid fears of shortages this winter, the natural gas market is flush with a record amount of gas and, as a result, natural gas prices are in full retreat. A U.S. government report last week reflected that natural gas supplies in underground storage facilities are almost 45% above what is normal for this time of year and now speculation is increasing that a record amount of gas will be left over from winter as the weather warms in the midwest and northeast U.S. this spring. As a result, prices for natural gas settled last Friday at $7.182 a million British thermal units, which compares with the $15.378 per million British thermal units closing price on December 13th. The drop in prices is allowing industrial buyers of gas to enter the long side of the market and hedge their risk of higher prices in the future.
No word yet from Bill O’Reilly on how the big oil and gas companies allowed such a situation to occur.

Have you noticed that crude oil prices have declined by 12% this month?
Crude-oil futures dropped $2 on the New York Mercantile Exchange yesterday, falling to the lowest level in two months. Benchmark light, sweet crude-oil futures for March fell $1.92 to settle at $57.65 a barrel, which is the lowest front-month settlement since Dec. 19th. That makes four straight days of losses amounting to almost $5 a barrel. Meanwhile, government data reflects that U.S. petroleum inventories are above the higher end of the average range for this time of year, and oil stockpiles are now at their highest level since late June, 2005.
No word yet from Bill O’Reilly on how the big oil companies, with all their market power, could not prevent this large decline in crude oil prices.

Always a source of common sense, the W$J’s George Melloan passes along this timely column today in which he patiently explains that demagogic calls for more control of energy markets is precisely the opposite approach that legislators need to be taking in response to rising energy prices. In so doing, he passes along this pearl of simple wisdom, which the confused Bill O’Reilly could really use:

But it’s also deplorably true that when constituents complain about soaring prices of natural gas and gasoline, [politicians seeking more regulation] have a ready scapegoat, “the giant oil companies.” Anyone still buying that line should ask himself why the “giant oil companies,” with all their market power, somehow couldn’t prevent crude oil from collapsing to $10 a barrel a few years ago.