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Economic Risk: The Gasoline Wild Card

By Doug Short
February 23, 2012

Of the many risks facing the US economy, the one I find most immediately concerning is the rapidly increasing rise in gas prices. My latest weekly gasoline update showed a 36-cent rise in gas prices, regular and premium, over the past nine weeks. In fact, it was about nine weeks ago that I filled the tank on our Prius at $2.98 a gallon just south of Myrtle Beach. Today the best price I can find in this area is $3.42.

Will prices continue to rise? Most assuredly they will. The news today was filled with items on the rapid rise in the price of oil. West Texas Intermediate Crude (WTIC) hit an intraday high of 108.05. Priced in euros, Brent futures hit an all-time high, beating the previous record set on July 3, 2008. WTIC also hit its all-time high that day, and gasoline prices also peaked the same week.

Unlike the situation in July 2008, which was in the midst of an ongoing recession with miles-driven plummeting and was shortly before the market crash that accelerated the consumer flight to frugality, February 2012 has an air of optimism. The S&P 500 is 0.01% away from setting a new interim high, currently dating from April 29, 2011, and reports are circulating that retail investors are returning to the market.

Perhaps gasoline at $4 plus in 2008 has conditioned consumers to be prepared for yet higher prices. Or perhaps the unusually warm winter and plunging price of the other gas (natural) has left sufficient room in the household energy allowance to absorb the rising gasoline costs without crimping the overall budget.

As for the stock market, here is a snapshot of CME gasoline spot prices against the S&P 500 since January of 2006. How much further can the two rise in tandem?

Read the rest and see the great chart here.

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Prepare for a Golden Age of Gas

The world is in the midst of a natural gas revolution. Even the sober International Energy Agency refers to a scenario it calls a “golden age of gas”. If such optimism proves right, the implications would not only be far greater than those of the eurozone’s painful dissolution, but would also be economically positive. Never forget that ours is a civilisation built on cheap supplies of commercial energy. The economic rise of emerging countries is bound to make the demand for commercial energy increase dramatically in the decades ahead. Gas matters.

This revolution has a name: “hydraulic fracturing”, colloquially known as “hydrofracking” or just “fracking”. As is true of nearly all of the technological revolutions of the past century, this one also originated in the US. The US Energy Information Administration explains that “[t]he use of horizontal drilling in conjunction with hydraulic fracturing has greatly expanded the ability of producers to produce natural gas from low permeability geologic formations, particularly shale formations.”*

While some innovations date to the 1970s, the EIA notes that “the advent of large-scale shale gas production did not occur until Mitchell Energy and Development Corporation experimented during the 1980s and 1990s to make deep shale gas production a commercial reality in the Barnett Shale in North-Central Texas.” But, by now, it adds, “[t]he development of shale gas has become a ‘game changer’ for the US natural gas market.”

The new activity has increased dry shale gas production in the US from 0.39tn cubic feet in 2000 to 4.8tn cubic feet in 2010, or 23 per cent of US dry gas production. Vastly more is to come. The EIA estimates 860tn cubic feet of “technically recoverable” US shale gas against just 273tn cubic feet in today’s “proved reserves”. If this estimate is correct, shale gas on its own would give the US 40 years of gas consumption, at current rates.

How large are the world’s shale gas reserves? The EIA asked consultants to examine 48 shale gas basins in 32 countries. Their report estimates “technically recoverable” global shale gas resources at 6,600tn cubic feet, roughly equal to today’s proved reserves. The largest identified resources, apart from those of the US, are in China (1,275tn cubic feet), Argentina (774tn), Mexico (681tn) South Africa (485tn), Australia (396tn), Canada (388tn), Libya (290tn), Algeria (231tn), Brazil (226tn), Poland (187tn) and France (180tn). Regions excluded from this analysis include Russia, central Asia, the Middle East, south-east Asia and central Africa. Global potential should be far larger still.

Read the rest here.


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How Closely are Oil Prices Tied to Economic Activity?


“Recent developments in oil markets and the global economy have, once again, triggered concerns about the impact of oil price shocks around the world. This column wonders whether the fuss is really necessary. It presents evidence of relatively small negative effects of oil price increases.

Increases in international oil prices over the past couple years, explained partly by strong growth in large emerging and developing economies, have raised concerns that high oil prices could endanger the shaky recovery in advanced economies and small oil-importing countries.

The notion that oil prices can have a macroeconomic impact is well accepted; the debate has centred mainly on magnitude and transmission channels. Most studies have focused on the US and other OECD economies. And much of the discussion has related to the role of monetary policy, labour markets, and the intensity of oil in production (Hamilton 1983, 1996, 2005, 2009, Barsky and Kilian 2004, Bernanke et al 1997, Blanchard and Gali 2007).

The manner in which oil prices affect emerging and developing economies has received surprisingly little attention compared with the large body of evidence for advanced economies. In an attempt to provide a broader and more encompassing view on the impact of oil price shocks, we document in recent research (Rasmussen and Roitman 2011) key stylised facts that characterise the relationship between oil prices and macroeconomic aggregates across the world.

The big picture

It is no surprise that import bills go up when oil prices increase. It is more surprising that GDP often goes up too. Figure 1 depicts the correlation between oil prices and GDP for 144 countries from 1970 to 2010. More precisely, it shows the cyclical components of oil prices and GDP, with long-term trends excluded. The set includes 19 oil-exporting countries, represented by red bars, and 125 oil-importing countries, represented by blue bars. A positive correlation indicates that when oil prices go up, GDP goes up, and when oil prices go down, GDP goes down.

The message is clear. In more than 80% of the countries, the correlation between oil prices and GDP is positive, and in only two advanced economies – the US and Japan – it is negative. One of the contributing factors to this pattern is that in 90% of the countries, exports tend to move in the same direction as oil prices.

Real GDP Compared to Oil Prices
Figure 1. Correlation between the cyclical component of real GDP and the cyclical component of real oil prices (1970-2010)

Anatomy of oil shock episodes

Given that periods of high oil prices have generally coincided with good times for the world economy, especially in recent years, it is important to disentangle the impact of oil price increases on economic activity during episodes of markedly high oil prices. Following Hamilton (2003), we identify 12 episodes since 1970 in which oil prices have reached three-year highs. The median increase in oil prices in these years was 27%.

We study the behaviour of macroeconomic aggregates during these episodes by comparing the median annual change in a particular variable during oil shock years to the median annual change over the entire sample period. This tells us of any unusual observed changes (Figure 2).

We find no evidence of a widespread contemporaneous negative effect on economic output across oil-importing countries, but rather value and volume increases in both imports and exports. It is only in the year after the shock that we find a negative impact on output for a small majority of countries.

Real GDP Growth less Median Growth
Figure 2. Real GDP growth in oil shock episodes less median growth (1970-2010, in percent)

Small effects for oil importers

To analyse multiple countries and control for global conditions, we adapt the basic autoregressive model of Hamilton (2003, 2005).

Our main interest is in the effect of an oil price shock on the economy of a typical oil-importing country. Taking into account the fact that higher oil prices are generally positively associated with good global conditions, we find that the effect becomes larger and more significant as the ratio of oil imports to GDP increases (Figure 3).

To trace out the full impact of an oil shock, we calculate impulse responses for a 25% increase in oil prices (Figure 4). The results indicate that the typical oil importer can expect a cumulative GDP loss of about 0.3% over the first two years, with little subsequent impact. For countries with oil imports of more than 4% of GDP (ie at or above the average for middle- and low-income oil importers), however, the loss increases to about 0.8% – and this loss increases further for those with oil imports above 5% of GDP. In contrast to the oil importers, oil exporters show little impact on GDP in the first two years but then a substantial increase consistent with the positive income effect, with real GDP 0.6% higher three years after the initial shock.

Oil Shock Episodes
Figure 3.

To put these numbers in perspective, it is useful to think of an economy where oil accounts for 4% of total expenditure and where aggregate spending is determined entirely by demand. If the quantity of oil consumption remains unchanged, then a 25% increase in the price of oil will cause spending on other items to decrease and, hence, real GDP to contract by 1% of the total. From this reference point, one would expect the possibility of substituting away from oil to reduce the overall impact on GDP. At the same time, there could also be factors working in the opposite direction, via, for example, confidence effects, market frictions, or changes in monetary policy. With our estimates of the GDP loss at only about half the level implied by the direct price effect on the import bill, the results presented here suggest the size of any such magnifying effects, if present, is not substantial across countries.

Are oil price increases really that bad?

Conventional wisdom has it that oil shocks are bad for oil-importing countries. This is grounded in the experience of slumps in many advanced economies during the 1970s. It is also consistent with the large body of research on the impact of higher oil prices on the US economy, although the magnitude and channels of the effect are still being debated.

Our recent research indicates that oil prices tend to be surprisingly closely associated with good times for the global economy. Indeed, we find that the US has been somewhat of an outlier in the way that it has been negatively affected by oil price increases. Across the world, oil price shock episodes have generally not been associated with a contemporaneous decline in output but, rather, with increases in both imports and exports. There is evidence of lagged negative effects on output, particularly for OECD economies, but the magnitude has typically been small.

Controlling for global economic conditions, and thus abstracting from our finding that oil price increases generally appear to be demand-driven, makes the impact of higher oil prices stand out more clearly. For a given level of world GDP, we do find that oil prices have a negative effect on oil-importing countries and also that cross-country differences in the magnitude of the impact depend to a large extent on the relative magnitude of oil imports. The effect is still not particularly large, however, with our estimates suggesting that a 25% increase in oil prices will typically cause a loss of real GDP in oil-importing countries of less than half of 1%, spread over 2 to 3 years.

These findings suggest that the higher import demand in oil-exporting countries resulting from oil price increases has an important contemporaneous offsetting effect on economic activity in the rest of the world, and that the adverse consequences are mostly relatively mild and occur with a lag.

The fact that the negative impact of higher oil prices has generally been quite small does not mean that the effect can be ignored. Some countries have clearly been negatively affected by high oil prices. Moreover, our results do not rule out more adverse effects from a future shock that is driven more by lower oil supply than the more demand-driven increases in oil prices that have been the norm over the past two decades. In terms of policy lessons, our findings suggest that efforts to reduce dependence on oil could help reduce the exposure to oil price shocks and hence costs associated with macroeconomic volatility. At the same time, given a certain level of oil imports, strengthening economic linkages to oil exporters could also work as a natural shock absorber.

The views expressed in this article are the sole responsibility of the authors and should not be attributed to the International Monetary Fund, its Executive Board, or its management.

By. Tobias Rasmussen and Agustin Roitman for the Oil Drum”

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A gas pump displays a sale of $58.74 at a gas station in Miami Beach, Fla. (credit: Joe Raedle/Getty Images)

A gas pump displays a sale of $58.74 at a gas station in Miami Beach, Fla. (credit: Joe Raedle/Getty Images)

TAMPA (CBS Tampa) — Talk about pain at the pump! Some Florida drivers are spending nearly $6 a gallon to fill up their gas tanks.

According to GasBuddy.com, motorists are shelling out $5.89 for a gallon of regular gas at a Shell station in Lake Buena Vista, topping out at $5.99 a gallon for premium. It doesn’t get better at a Suncoast Energy station in Orlando, where drivers are paying $5.79 for a gallon of regular.

“Prices over in the Disney World area are much higher than any other place in Florida,” Jessica Brady, AAA spokeswoman, told CBS Tampa, adding that people regularly complain about gas prices in that area.

The Sunshine State is opening up its wallet, paying an average of $3.67 a gallon of unleaded gas, 12 cents more than the national average. And it’s only expected to go up.

“It doesn’t look like we will have relief at the pump anytime soon,” Brady told CBS Tampa. “I do think we will see prices surpass $4 a gallon. I think we will see that closer to spring time.”

One reason for the high prices is the conflict with Iran over the Strait of Hormuz. Iran has threatened to disrupt oil shipments through the waterway due to the European Union sanctions leveled against the country over its nuclear program, causing the price of crude to skyrocket. Trading on a barrel of crude today is a little over $106.

Another reason for the high gas prices: positive economic news. The drop in the unemployment rate and improved housing market numbers have caused gas and oil prices to rise.

“I know it frustrates quite a few consumers why positive news will lead to higher prices,” Brady told CBS Tampa. “It really just comes down to speculation.”

A third culprit behind the gas price boom is Greece. The EU’s bailout for the indebted country only adds to the global fuel demand.

And because of these reasons, Brady believes that Florida and the rest of the U.S. could see historical gas prices.

“I think this year we will see much higher highs.”

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Mike Breard: Brent Crude Could Hit $140 a Barrel

“Tensions with Iran have been pushing oil prices up over $100 a barrel and it won’t take a full-blown war to send them much higher, possibly to $140 a barrel, says Mike Breard, an oil and gas analyst at Hodges Capital in Dallas.

Oil futures are skyrocketing thanks to Iranian tension, with U.S. crude futures hovering over $102 a barrel and Brent futures, which drive European markets, at around $118.

Brent and U.S. futures historically trade at a much narrower spread, and many analysts expect that gap to narrow as the U.S. economy improves.

The West has been slapping fresh sanctions on a defiant and nuclear-ambitious Iran, which is taking steps to cut off oil supply and even threatened to close down the Strait of Hormuz, a key waterway for the world’s oil industry.

With nerves on edge and the Strait of Hormuz crawling with edgy warships and oil tankers, a messy encounter would be enough to send oil skyrocketing.

“All that has to happen is for a tanker to hit a mine and the prices will be jumping,” says Breard, according to the Christian Science Monitor.

“A lot of people are afraid of oil rising to $140 a barrel.”

Full article 

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Iraq oil exports decline in January

BAGHDAD (AP) — Iraq’s oil ministry says oil exports have declined slightly in January compared to the previous month.

Monday’s statement says last month oil exports averaged 2.107 million barrels per day, down from 2.145 million barrels per day in December.

The sales grossed $7.123 billion based on an average price of $109.081 per barrel. December’s revenues stood at $7.061 billion with an average price of $106.18 per barrel.

The oil was sold to 29 international oil companies.

Iraq relies on oil exports for 95 percent of its revenues, and the uncertainty in the market stemming from the conflict between the West and Iran over its controversial nuclear program has helped support global crude prices.


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Oil jumps to 9 month high

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Oil prices jumped to a nine-month high above $105 a barrel on Monday after Iran said it halted crude exports to Britain and France in an escalation of a dispute over the Middle Eastern country’s nuclear program.

By early afternoon in Europe, benchmark March crude was up $1.91 to $105.15 per barrel in electronic trading on the New York Mercantile Exchange. Earlier in the day, it rose to $105.21, the highest since May. The contract rose 93 cents to settle at $103.24 per barrel in New York on Friday.

Markets in the United States are closed Monday for the Presidents Day holiday.

Iran’s oil ministry said Sunday it stopped crude shipments to British and French companies in an apparent pre-emptive blow against the European Union after the bloc imposed sanctions on Iran’s crucial fuel exports. They include a freeze of the country’s central bank assets and an oil embargo set to begin in July.

Iran’s Oil Minister Rostam Qassemi had warned earlier this month that Tehran could cut off oil exports to “hostile” European nations. The 27-nation EU accounts for about 18 percent of Iran’s oil exports.

The EU sanctions, along with other punitive measures imposed by the U.S., are part of Western efforts to derail Iran’s disputed nuclear program, which the West fears is aimed at developing atomic weapons. Iran denies the charges, and says its program is for peaceful purposes.

Analysts said Iran’s announcement would likely have minimal impact on supplies, because only about 3 percent of France’s oil consumption is from Iranian sources, while Britain had not imported oil from the Islamic republic in six months.

“The price rise is more a reflection of concerns about the further escalation in tensions between Iran and the West,” said commodity analyst Caroline Bain of the Economist Intelligence Unit. “Banning the tiny quantities of exports to the U.K. and France involves very little risk for Iran — indeed quite the opposite, it catches the headlines and leads to a higher global oil price, which is something Iran is very keen to encourage.”

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Iran Stops Oil Sales to UK, French Companies: Ministry

Iran has stopped selling crude to British and French companies, the oil ministry said on Sunday, in a retaliatory measure against fresh EU sanctions on the Islamic state’s lifeblood, oil.

“Exporting crude to British and French companies has been stopped … we will sell our oil to new customers,” spokesman Alireza Nikzad was quoted as saying by the ministry of petroleum website.

The European Union in January decided to stop importing crude from Iran from July 1 over its disputed nuclear program, which the West says is aimed at building bombs. Iran denies this.

Iran’s oil minister said on Feb. 4 that the Islamic state would cut its oil exports to “some” European countries. The European Commission said last week that the bloc would not be short of oil if Iran stopped crude exports, as they have enough in stock to meet their needs for around 120 days.

Industry sources told Reuters on Feb. 16 that Iran’s top oil buyers in Europe were making substantial cuts in supply months in advance of European Union sanctions, reducing flows to the continent in March by more than a third – or over 300,000 barrels daily.

France’s Total [TOTF.PA  41.68    0.40  (+0.97%)   ] has already stopped buying Iran’s crude, which is subject to fresh EU embargoes. Market sources said Royal Dutch Shell [RDSA.L  2293.00    -1.00  (-0.04%)   ] has scaled back sharply. Among European nations, debt-ridden Greece is most exposed to Iranian oil disruption.

Read the rest here.

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The hydraulic fracturing of shale formations to develop natural gas has no direct connection to groundwater contamination, according to a study released Feb. 16 by the Energy Institute at the University of Texas at Austin    .

The study reported that many problems blamed on hydraulic fracturing are related to processes common to all oil and gas drilling operations, such as casing failures or poor cement jobs.

University researchers also concluded that many reports of contamination can be traced to above-ground spills or other mishandling of wastewater produced from shale gas drilling, rather than from hydraulic fracturing, Charles “Chip” Groat, an Energy Institute associate director, said in a statement.

“These problems are not unique to hydraulic fracturing,” he said.

The research team examined evidence contained in reports of groundwater contamination attributed to hydraulic fracturing in three prominent shale plays — the Barnett Shale in North Texas; the Marcellus Shale in Pennsylvania, New York and portions of Appalachia; and the Haynesville Shale in western Louisiana and northeast Texas.

“Our goal was to provide policymakers a foundation for developing sensible regulations that ensure responsible shale gas development,” Groat said. “What we’ve tried to do is separate fact from fiction.”


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Economy can handle higher oil, gas

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Stocks continued their 2012 surge Thursday, with the Dow breaching 12,900 and the S&P 500 hitting its highest level in nine months. The Nasdaq rose to a level not seen since the dot com bubble more than a decade ago. Commodities also continued their 2012 trend, with a mixed session highlighted by strength in energy and weakness in agricultural commodities.

The recent action — broad strength in stocks, mixed performance in commodities — belies the conventional wisdom that all “risk assets” are moving in tandem.

There is rotation happening within the commodity sector but, broadly speaking, it should be another banner year for hard assets, according to Frank Holmes, CEO and CIO of U.S. Global Investors.

In addition to continued demand from emerging markets and signs of life in the U.S. economy, Holmes notes global central banks have embarked on another easing cycle.

Indeed, Morgan Stanley’s economics team declares “the great monetary easing (part 2), is in full swing,” noting 16 major central banks have eased policy since the fourth quarter, including the U.S. Fed, Bank of Japan, European Central Bank, Bank of England and the central banks of Sweden, China and India.

“In response to a slowing global economy and further downside risks emanating from the possibility of an escalating Eurozone debt crisis, central banks all over the world…have been deploying their arsenal for a while now, and should continue to do so,” Morgan’s team writes. “The result is aggressive monetary easing on a global scale.”

Based partially on this easy money, as well as fear of supply disruptions, more capital expenditures in the U.S. and normal seasonal patterns, Holmes is most bullish on oil and gas right now.

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Oil set for biggest 2012 weekly gain

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Oil climbed in New York, heading for the biggest weekly gain this year, as signs of an improving U.S. economy and progress on a bailout for Greece bolstered the outlook for fuel demand. Brent touched an eight-month high.

West Texas Intermediate crude rose as much as 1.2 percent today and is up 4.9 percent this week. A gauge of U.S. leading indicators probably advanced in January, economists said before the report today. European governments may cut interest rates on emergency loans to Greece and use European Central Bank funds to plug a financing gap, two people familiar with discussions said.

“We’ve had a strong week and there’s strong upward momentum,” said Addison Armstrong, director of market research at Tradition Energy in Stamford, Connecticut. “The headlines are what’s driving this market and if they point to a better economy, prices will rise. It looks like a Greek deal is going to finally get done.”

Oil for March delivery rose $1.16, or 1.1 percent, to $103.47 a barrel at 9:29 a.m. on the New York Mercantile Exchange. The contract reached $103.57, the highest level since Jan. 5. Futures are headed for the biggest weekly gain since Dec. 23.

Brent oil for April settlement dropped 43 cents, or 0.4 percent, to $119.68 a barrel on the London-based ICE Futures Europe exchange. The contract touched $120.70, the highest level since June 15.

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A Glut of Zinc Hits a Twenty Year High

“The largest glut of zinc in almost two decades is threatening to curtail a rally in prices as record production expands inventories to the highest since at least 1984.

Supply will outpace demand by 539,000 metric tons, the most since 1993, according to Standard Bank Plc. Stockpiles of the metal used in brass and steel will reach 2.2 million tons, Barclays Capital estimates. Prices will drop 11 percent to $1,832 a ton this year, the median of 15 analyst and trader estimates compiled by Bloomberg shows. That may curb profit for Zug, Switzerland-based Xstrata Plc, the biggest producer.”

Full article

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