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Why Do Oil Prices Keep Rising?

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Fundamentals, not monetary policy, drive crude.

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Inflationistas are crowing over the price of crude hitting $113 a barrel and the March Producer Price Index as well.

Indeed the PPI soared last month, primarily on account of energy and food.

Before seasonal adjustment, the Producer Price Index for Finished Goods climbed 1.9 percent in March to 175.4 (1982=100). From March 2007 to March 2008, finished goods prices rose 6.9 percent. Over the same period, the index for finished energy goods increased 20.4 percent, prices for finished consumer foods moved up 5.8 percent, and the index for finished goods less foods and energy advanced 2.7 percent.

Gasoline and diesel prices are soaring as well.

Gasoline Prices 2008-04-14


Chart courtesy of the Department of Energy.


Gasoline prices are about 6 cents higher than last week, and 51 cents higher than a year ago. Diesel prices are 10 cents higher than last week and $1.18 higher than a year ago.

Higher diesel prices were behind a proposal by independent truckers to participate in a "National Shut-Down" on April 1. I wrote about Trucker Dan's proposed strike on March 24, in Open Letter To All Truckers. The shutdown was a big flop as I expected.

Other than isolated incidents of truckers deliberately driving slow and blocking traffic nothing happened. Is blocking traffic on freeways supposed to win sympathy? In the end, truckers had loads to deliver, which they delivered. If they failed to do so, it might be the last load they would get. Who wants to do business with an unreliable trucker?

Gasoline Consumption Declines

In a sign of economic stress, gasoline usage is declining. This Week In Petroleum is asking Where Have All the Drivers Gone?

Does it seem like there are fewer cars on the highway this year? The recent trend in motor gasoline consumption would appear to indicate so. Gasoline consumption has been declining for at least six months. Households may be thinking twice about jumping in the family car as a slowing economy and rising prices are stressing pocketbooks from Maine to Hawaii.

During the first half of 2007, motor gasoline consumption was up by 0.9 percent compared with the same period the previous year. But, during the second half of 2007, gasoline consumption declined by 0.1 percent from the year before. In fact, fourth-quarter consumption fell by 0.4 percent. The drop in gasoline consumption, the first since the recession of 2000, should come as no surprise with the slowing economy and soaring gasoline prices. The first quarter of 2008 continued to show an even sharper decline in consumption of 0.6 percent compared to the same period in 2007
.

Inquiring minds might be asking: If U.S. consumption is down why are prices rising? Here are the answers:

  • The dollar is falling
  • Global demand is still rising
  • Peak Oil
  • Speculation


Russia Supply Jitters

The latest peak oil news shows Russian Oil Slump Stirs Supply Jitters.

Russian oil production, for years a vital source of new supplies for world markets, is showing signs of a slump, adding to uncertainties that have helped push oil prices to record highs. Russian output fell for the first time in a decade in the first three months of this year, according to the International Energy Agency, which represents industrialized oil-consuming countries. It said Russian production averaged about 10 million barrels a day, a 1% drop from the first-quarter of 2007.

Declining production from the world's largest oil producer and one of its largest exporters puts further pressures on an already strained market and adds to the potential for higher prices for a global economy coping with a slowdown.

The economic downturn in the U.S., by far the world's largest oil consumer, has taken some steam out of oil demand. But fast-growing Asia and other places are still adding to demand, and many analysts worry that a global supply pinch later this year could send prices higher
.

Problems On Our Doorstep

The oil fields in Saudi Arabia are in decline. So is the second largest oil field in the world, Cantarell, in Mexico. One year ago, Rigzone reported Mexico Tries To Save Big, Fading Oil Field.

Cantarell, which currently produces one of every 50 barrels of oil on the world market, is fading so fast analysts believe Mexico may become an oil importer in eight years. That would batter Mexico's economy, which depends on oil exports to fund 40% of its government spending.

Benjamin Melo, manager of the Akal C platform, tries to assess the future by looking out across the field: "This has been a generous field. And there is still a lot of oil down there. But it won't last forever"
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Supply Demand Issues Do Not Constitute Inflation

This is a simple supply demand issue. Supply drops, demand rises, prices rise. And this has nothing to do with inflation. Someone who gets it is "Genesis" on the Market Ticker Forum.

On the one hand we have their house price collapsing back to intrinsic value (which must happen) and at the same time we have the "bubble kids" shifting their bets into the commodity market fueling insane PPI and CPI increases, which means you're paying more for everything you need to survive, from food and fuel to copper pipe for that house you'd like to build.

And since fuel is in literally everything, there is no escape. Oil is a primary component in plastics, for example. Go walk around your house and tell me how much of what you have in that home would not be there were it not for some form of plastic!

In addition oil is food. The obvious part, of course, is the transportation of the food to your local store, but it doesn't stop there. Natural gas is the primary component in fertilizer (ammonia) and of course tractors need diesel fuel to operate.

There are some who claim that this is a matter of "inflation."

If you define "inflation" as "price change", yes. But that's not the true definition of inflation - inflation is first and always a monetary phenomena. Unfortunately the bad news is that because this is not being caused by monetary inflation there is no monetary solution
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No positions in stocks mentioned.
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