Monday, December 10, 2012

Our Economy's Developing Secret Weapon ... The Falling Price of Oil

Where I live a gallon of regular gasoline is priced currently at ~$3.20. What if it fell to around $2.50 per gallon or perhaps even as low as $2.20 within the next several months? Wouldn't that be great?

Well, get ready for such greatness because that's what's going to happen. At least that's what my crystal ball says.

And if it does come to pass, American consumers will have a whole lot of extra spending money in their pockets. And American businesses will have substantially lower operating costs as well. As a result, consumer spending will be favorably impacted by both more spending money and lower prices, and business profits should increase, too. All that will lead to more jobs.

Admittedly, this may be just a dream, but I don't think so. In fact, my guess is that lower oil prices may well turn out to be our economy's not-so-secret weapon in 2013 and beyond.

OPEC is about to get its comeuppance. And that brings a smile to my face.

{NOTE: The biggest risk to long term North American energy indpependence lies in U.S. political policy. My bet is we'll end up doing the right thing and drill, baby, drill, if only after a lot of hemming and hawing from the Remocrats and the green lobby. To learn more about our enormous potential as a continent, The North American Gusher has the story about the vast hydrocarbon resources in the U.S., Canada and Mexico. Now all we need is for the government knows best gang to let the private sector do its thing, and it will do just that if government gets out of its way.}

Now let's return to today's rapidly developing situation where supply is outpacing demand and is likely to continue to do so for a long time to come.

Raging Oil Price Will Burn OPEC provides the background for the probable oil price collapse in 2013:

"This week's meeting of the Organization of the Petroleum Exporting Countries ought to have a party atmosphere. Averaging almost $112 a barrel to date, Brent crude oil looks set for its best year ever in 2012.

 But any celebration of that would ring hollow. Oil prices are at risk of a major correction next year. Deutsche Bank says the range of analyst forecasts for oil prices is at "extreme levels," with $50 between the high and low ends. Beyond 2013, OPEC faces growing tensions that threaten its long-term survival.

Today's high oil prices have less to do with rampant demand and more to do with sheer rampage. Even as OPEC delegates meet in Vienna, explosions will likely be rocking Damascus. Syria doesn't produce much oil itself, but it symbolizes the ongoing Arab Spring. Such turmoil underpins the oil prices that OPEC governments rely on for funding. . . .

Thing is, those high prices also damp demand for oil—especially amid so much economic uncertainty—and encourage alternative energy supplies.

The International Energy Agency thinks global demand for oil will have gone up by 670,000 barrels a day this year. Its forecasts imply average annual growth of about 660,000 barrels a day out to 2020. That is a far cry from the 1.3 million barrels a day annual average in the decade leading up to 2008.

Meanwhile, oil supply is rising outside of OPEC. In September, U.S. oil production hit 6.5 million barrels a day, the highest level in almost 15 years. The high oil prices of the past decade spurred the opening of unconventional resources such as the Bakken Shale, which has boosted North Dakota's output almost sixfold in the past five years. That state alone now pumps almost as much oil as OPEC-member Qatar. To the north, Canada is developing its vast oil sands.

Longview Economics points out that four of the past five years saw growth in global oil demand outstrip supply increases, supporting prices. This year, however, Longview forecasts supply growth will outstrip demand by 800,000 barrels a day. It expects a surplus next year, too, and foresees Brent dropping as low as $70 a barrel in the first half of 2013, 35% below today's price.

This is borne out by rising oil inventories. Analysts . . . expect them to increase strongly again in the first half of 2013. . . .

Besides the U.S. and Canada, OPEC has a big problem within its own ranks: Iraq. That country now pumps more than 3.1 million barrels a day, surpassing sanctions-hit Iran to become OPEC's second-largest producer. By 2015, Iraq could be producing 4.2 million barrels a day under the IEA's base-line scenario, and 6.1 million by 2020.
Fellow OPEC members will have to cut output to make way for Iraq's barrels or risk flooding the market. Saudi Arabia's attitude is key. OPEC's largest producer, it also holds the lion's share of spare capacity. Traditionally, it has cut or raised production as needed to support or cap prices. But with an eye on Damascus and its own domestic pressures, Saudi Arabia may not be willing to bear all the burden of giving up market share to make way for Iraq and support oil prices.

The scene is set for a potential conflict over which members get to produce what. The fact is, many OPEC members are unstable, over-reliant on oil revenues and unable or unwilling to invest in new fields. In 2011, 36.5% of the group's output came from countries whose output peaked in the 1970s. Meanwhile, most members need oil prices averaging more than $100 a barrel to balance bloated government-spending budgets, according to a paper published in October by Chatham House. For example, Iran needs north of $120 against Saudi Arabia's $94.

With Syria burning in the background, those break-even costs will likely rise further, increasing tension within OPEC. Sure, geopolitics remains a wild card: Iraq is fragile and Iran's nuclear program continues. These threats offer support to oil prices. But in 2013, OPEC will begin seeing what fear and high prices have done for both demand and competing energy suppliers."

Summing Up

So let the OPEC gang and its leadership fight among themselves. We'll just get busy producing more oil and gas right here in North America.

As long as the U.S., Canada and Iraq increase their output, the gap between output and global demand will widen. Mexico is definitely a potential big time North American player and ally as well. And as this comes to pass, global oil prices will be under downward pressure for the foreseeable future.

OPEC's comeuppance has been a long time coming, but it sure looks like it's arrived. And it couldn't happen to a better group of countries belonging to the OPEC cartel.

Throw in the conservation measures underway, the moderating economic growth, and all the ingredients are in place for the implosion of OPEC as a future setter of oil prices.

Of course, things could go wrong. For example, serious political unrest in the world could make all this just a mirage of happy talk, but I don't see things happening that way. And if the world does become more unstable politically, economies will have yet another reason to slow. In turn, that reduced demand for oil will offset the lower supply, and prices still will be much lower than today's are.

So whatever happens, my crystal ball says that gasoline will soon be priced under $3.00 and headed to $2.50 or below per gallon, and the best news is that it will stay that way indefinitely. The U.S. consumer will have more money in his pocket and U.S. businesses will experience lower transportation and related costs in their operations.

Too good to be true? Not at all.

The time for permanently lower oil prices is rapidly arriving.

Talk about a confidence booster. We'll find a big one at our local gas station. Drill, baby, drill!

Thanks. Bob.

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