Dropping Dollar Prompts Basis Change

OPEC members, Iran and Venezuela, have recently called for changing the currency basis for crude oil from US dollars to Euros. What’s behind this move?

The following graph shows the FOB prices of OPEC crude oil in $/B and Euros/B.

The data reveal that the weakening dollar has translated into a loss in OPEC’s buying power in international markets. The 30% drop in the exchange rate provided an incentive for OPEC to increase prices.

The weak dollar is tied to the increased national debt that has grown from $5.7 trillion at end of the Clinton administration to $9.1 trillion today. Of this debt, $5 trillion is held by the public including $2.25 trillion by foreign governments and $4 trillion is held by the federal government. Total debt is now 77% of GDP (Gross Domestic Product) or $33,000 per U.S. citizen.

The largest foreign holders of U.S. debt are Japan ($582 billion), China ($397 billion), United Kingdom ($266 billion) and oil exporters ($126 billion).

The United States must reduce this debt by decreasing borrowing, saving money and exporting more goods and services. Much of this problem relates to oil imports which made up 27.6% of the 2006 trade deficit.

America’s oil appetite has to take some of the responsibility for the increase in the debt and decline in the value of the dollar. Increasing imports reduce economic activity and increase the cost of U.S. goods. Spending on the Iraqi war to maintain stability in the Middle East and ensure continued flow of oil imports also increase national debt and weaken the dollar.

At some point these forces may send the economy into a tailspin. Unfortunately, like the national debt these future hardships will be borne by the American public who will be victimized again by poor government decisions.

[Sources: “National Debt,” Jim Landers, The Dallas Morning News, November 28, 2007, p. 6D; http://www.x-rates.com; http://www.eia.doe.gov/emeu/mer/prices.html]

Oil Imports and High Prices Contribute to Trade Deficit

According to The Dallas Morning News of November 14, 2007, U.S. crude oil imports in 2006 were $225.2 billion. These imports accounted for 27.6% of the 2006 trade deficit of $817 billion. The U.S. had trade deficits with the OPEC countries led by Saudi Arabia, Venezuela and Venezuela. The U.S. had a $103.8 billion deficit with Saudi Arabia.

Will History Repeat Itself?

Over the period 2001-2006

* World oil consumption increased by 6.9 million b/d or 9%
* Demand growth in China accounted for 37% of the volume
* Increased consumption in the United States contributed 14%
* This growth occurred in spite of a 280% rise in OPEC oil prices from $19.73/B to $55.35/B

This is a marked difference to what occurred between 1979 and 1982.

* OPEC oil prices rose 168% from $19.88/B to $33.48/B
* World oil demand dropped by 6.3 million b/d or 10%
* OPEC output dropped 37% and their market share declined from 48% to 35%

While consumers might hope for some price relief, today’s market is different from conditions in 1979.

* The world oil and gas industry has become more efficient through increased application of finding and development technology so consumers can’t expect a dramatic increase in supply
* The easy to apply energy savings methods are already in place so we can’t hope for simple measures to reduce oil use
* China and India’s share of world oil markets was 3.8% in 1979 and 12.0% in 2006 and their economies are using low labor costs to manage higher energy expenses
* The Federal government seems unwilling to take the necessary steps to improve automobile and truck fuel economy unlike the steps taken in the late 70s

What is the same is the lack of long-term thinking to provide a solution to the world’s energy appetite. It has been thirty-four years since the Arab Oil Embargo and the Federal government has failed to develop an energy strategy. So while the government considers new fuel sources and fossil fuel reductions that may take years to occur, consumers are left to deal with the short-term consequences of a bi-partisan policy failure.

PetroChina Knocks ExxonMobil Out of First

PetroChina has become the world's largest public oil and gas company at $980 billion according to the Dallas Morning News. Its valuation is four times that of ExxonMobil.

PetroChina ranked 13th in oil equivalent reserves based on 2005 figures. National oil companies occupy the top spots led by Saudi Arabian Oil Company with over 300 billion barrels. Last year PetroChina had 20.5 billion barrels compared to ExxonMobil's 22.1 billion and Royal Dutch Shell's 11.3 billion. For a complete list of the top 50, please see Leading Oil and Gas Companies Around the World.

Source: The Dallas Morning News, November 6, 2007, p. 3D.

New and Old Beam Pumps

Somertimes when we think that something is a "modern" invention, it turns out to have been around a lot longer. Take for example, the beam pump, a staple of oilfield production since the early 20th century. The pump jack is used to bring oil from the reservoir below the surface to the surface.

It seems that this oil patch fixture has been around a lot longer than one might think as I discovered during a recent trip to Virginia. In Saltville, VA the commercial development of salt began in the 1780s. Th early "salt works" consisted of open wells from which brine was drawn, furnaces in which the material was boiled in iron kettles, and salt buildings that stored the salt. The brine was brought to the surface by "walking beam pumps."

During the Civil War, salt production grew from 15,000 bushels to four million barrels in 1864.

More Information on Gasoline Prices

Additional information on gasoline prices can be found at the following sites:

• Gasoline Pump Prices
• Gasoline and Crude Oil Prices
• Oil & Gas FAQs
• Pain at the Pump
• Gasoline and Diesel Fuel Update
• A Primer on Gasoline Prices
• U.S. Retail Gasoline Prices

How High Will Prices Go?

With crude oil prices in the $90 range, the average motorist is wondering how high gasoline prices will go. Crude oil spot prices were $94.16/B (West Texas Intermediate at Cushing, OK on 10/31/07) and average retail gasoline prices were $2.872/gallon (10/29/07).

The forecast and actual gasoline prices were equal on 9/5/07. Since that time, crude prices have risen $18.42/B while gasoline prices have been around $2.85-$2.87/gallon. Refiners have not yet passed these costs to consumers, but it that may change just in time for Thanksgiving travel. The pass through might amount to 44 ¢/gallon.

A regression model developed by Petrostrategies, Inc. suggests that gasoline prices should be $3.41/gallon based on the prevailing oil prices. So why the 54 ¢/gallon price difference?

The growth of gasoline inventories since early September may have cooled refiner’s enthusiasm for price increases. Keeping prices low during November elections might also have been on industry executives mind.

What’s your take on this market situation and when do you expect prices to exceed $3/gallon nationally?