Gas and oil prices

I’m not an expert here, just a layman with serious questions. I’ve been hearing that Saudi Arabia is the only country with serious unused oil pumping capacity, but that Saudi pumping more won’t do anything for gas prices because most of their extra capacity is in ‘sour’ crude with high sulfur content which is basically useless for making low pollution gasoline. So, I’m looking at Bloomberg and I notice that Dated Brent, which is a .4 percent sulfur “sweet” crude, is the lowest priced crude. Now strictly from an economic perspective if there is a lack of supply of “sweet” crude, a big demand spike for “sweet” crude coming up in the form of the summer driving season in the US and a real possibility of a supply increase in “sour” crude in the form of a 6% or more increase in OPEC (basically SAudi) production, what should we see? We should be seeing serious rising prices in “sweet” crude and falling prices in “sour”. If the problem is really severe enough to cause $2/gallon gas prices, we ought to be seeing a reversal of the usual price pattern with the ‘sweet’ crudes selling higher than the, supposedly useless, ‘sour’.

So what does it all mean? Well, what it really all means is that commodities traders are trading on news from Iraq and Saudi Arabia with the occasional insanity from Communist Venezuela, in spite of the fact that the majority of world oil no longer comes from the Middle East. It looks to me like the ‘problem’ isn’t refining capacity or lack of crude supply, it’s paranoia run amok. Something similar happened in the ’70s. In 1973, silver prices were about $1.95/ounce. The Hunt family wanted to purchase precious metals as an inflation hedge, but gold ownership was illegal in the US, so they bought silver. By 1979 they had formed a silver buying pool which owned over half the deliverable silver supply at the time and prices eventually peaked at $54/ounce. By March 26 of 1980 prices were down to $21.62/oz. and the following day they plummeted 50% to $10.80. Current silver prices are $5.66/ounce. In 1988 the Hunt brothers were convicted of illegally manipulating markets. I don’t see any illegal market manipulation happening here because I don’t think there’ a conscious effort to ‘corner the market’, but the situation is similar with fear begetting buying begetting higher prices begetting more fear begetting more buying. The big problem, for OPEC, the value of the US Strategic Reserve (which we’re still pumping into even at these prices) and the incentive for high cost domestic production will be if the prices get much more out of wack. The higher they fly, the harder they are going to fall and at the current rate they are going to fall hard when they do.

I’m still going with the theory that we need to give oil companies a big tax credit, on the order of $5-10/barrel, for producing more oil domestically or importing more non-Opec oil. And I’m not normally in favor of tariffs, but I think we ought to pay all the Sept. 11 related costs out of an import fee on Saudi oil. It’s called restitution.

More on oil on my site Financial Options including The Secret Way to Play Oil.

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