Why did Oil Prices Go Back Up?

Above is a graph showing crude market prices over the last few years.  More on the spike from this most recent February below.

I've been meaning to get this post up for over a month.  Oil prices rose back to 2008 levels suddenly in February.  The price increases coincided with civil protests in the Middle East.  First starting in Egypt the protests expanded to Libya, Iran, Saudi Arabia and Syria.  This unrest ultimately leading to the stepping down of Egypt's long time dictator and an open revolution inside Libya which continues to this day.

Of course the unrest is the defacto explanation for oil prices as the news covers the rising pump prices.  In my own small oil business I haven't had one call to my office by customers asking "why is diesel a dollar more than a few months ago" which is odd.  Usually get a consistent stream of calls as oil prices hit certain dollar marks.  As we past $3 and moved onto $4 a gallon for finished products I didn't hear a peep from my customers.  It seems as if the American consensus is that petroleum is just higher than $3 a gallon and $4 is acceptable.

Here is what I don't get though in this rational script of why prices are high.  For two weeks Egypt's protests grabbed headlines and the markets didn't move but a little bit per barrel.  It wasn't until President's Day, a day the US Markets were closed, that a true price spike occurred. This spike was isolated to just commodity futures trading (not Supply and Demand forces).


There was no watershed event in the Middle East (other than the lack of Egypt's upheaval spreading beyond its Euro-aware neighbor Libya).  The grand scheme of world oil production Libya shutting off its spigot would not normally cause a move like this as a permanent realignment of pricing.  But on a day the US Markets happened to be closed a ran occurred in smaller trading markets with an expected result caused the following day in the US.  I can't help but actually see this as a speculative run attempting to push the price of oil up. 


This strikes me as literally a bold and obvious move to manipulate markets like something out of the Age of America's Robber Baron past.  Player's with market power exercised it in a coordinated way not as an expression of market efficiency but taking advantage to leverage their own market power to pull profits off the top.  Our current oil prices are not solely set by a currently adequate and for the most part unchanged Supply and Demand but because of trading volumes in a futures market.


I also want to share with you my perspective on President's Day.  I remember it because I was at my desk and the Editor of OPIS (the Oil Price Information Service) sent out an email that immediately grabbed my attention.  See below:

Below is the email I received.  I wanted to post it for a single reason.  To document the day prices went back up without a real market explanation.  See OPISnet.com's Editor's email below:

---------------------------- Original Message ----------------------------

Subject: Oil Futures Soar in Electronic Trading; Marketers See Hefty
Tuesday Price Increases
From:    "Oil Price Information Service" >
Date:    Mon, February 21, 2011 11:10 am
To:      "Mark Fitz" >
--------------------------------------------------------------------------


This breaking news story is brought to you by Oil Price
Information Service...

   The peace and calm for marketers who are today observing
Presidents' Day has been interrupted by a paroxysm in global
prices for crude and refined products, which almost certainly
will add 5cts/gal or more to wholesale prices tomorrow.
   The New York open outcry markets are closed, but some hefty
volumes have changed hands in electronic trading and sent
overseas crude prices as high as they've been since September
2008,[NOTE: bold emphasis is mine] and pushed gasoline and diesel prices up 5- 7cts/gal in the
process.
   Brent crude, which has been the driving force behind NYMEX
RBOB and heating oil futures price gains in 2011, traded for over
$105/bbl this morning, spurred by violence that appeared to
escalate into chaos in Libya. Libya produces some 1.7 million b/d
of crude. There are also concerns that violence in the Persian
Gulf may be ratcheted higher as unrest in the region shows no
completion date.
   April Brent crude was trading at $104.73/bbl, up $2.21/bbl at
presstime.
Even higher numbers were seen in electronic WTI action, where the
expiring March contract moved up $4/bbl to $90.19/bbl and the
April contract (which will soon represent the prompt month)
rallied some $4.38/bbl to $94.08/bbl. This latter rally has the
interest of technical analysts, who believe it may signal a much
larger pop.
   March RBOB futures were up 5.87cts/gal at $2.61/gal and April
(the low RVP month) moved up 5.87cts /al to $2.749/gal.
   March heating oil was up 6.46cts/gal at $2.7775/gal and April
barrels were 6.52cts/gal higher at $2.7912/gal.
   Most U.S. oil companies are closed today, so OPIS has not yet
seen a host of intraday moves. Terminals are quite busy, however,
as jobbers race to get ahead of price increases that might add
$400-$500 per load when spot markets reopen for business
tomorrow.

President's Day 2011 was the day the oil market returned to 2008 prices.
People far smarter and better qualified than me have theories of why. 
Their theories just don't make sense in my gut.

Now the US Energy Information Administration has this to say about crude prices and Libya:

Crude Oil and Liquid Fuels Overview.  EIA expects continued tightening of world oil markets 

over the next two years, particularly in light of the recent events in North Africa and the Middle East, the world's largest oil producing region.  The current situation in Libya increases oil market uncertainty because, according to various reports, much of the country's 1.8-million bbl/d total liquids production has been shut in and it is unclear how long this situation will continue.  The market remains concerned that the unrest in the region could continue to spread.

Libya and the Middle East unrest definitely has something to do with prices. But they don't have anything to do with a jump like we've seen. A sustain jump indicative not of risk in the future but of a realignment of Supply and Demand needs.  Especially a jump that occurs primarily around a single big day of trading when the US market is closed and no really big information has changed the market's perspective. Lets look at prices during that short time frame.

Notice the price spike in this shorter time frame.  That was President's day.  Or in this chart the day missing between Friday before and the Tuesday after President's day (as our markets were closed).  Supply and Demand did not change.  Only the volume of people in the market for futures. 

My only real thought that derives from this is a need for diversification and true substitutes for petroleum derived liquid fuels. 

NOTE: For those who disagree and believe that markets are rationally pricing the risk of a Libyan oil being sucked out of the market here is a list of production numbers showing where Libya is in the grand scheme of things (this being non-academic and provided by a 3 min google search).  The new production that has come on line since 2007 I would believe should have offset a good chunk of this.  I don't see supply interruptions in my market either leading me to believe there is still plenty of crude available for refining and available tank space for storing refined product (unlike 2006-2008 in my market where there were consistent outages by my suppliers).  And again, just my passing thoughts without even close to enough research to really justify a strong argument.  This is just my gut thinking.

OPIS Newsflash on Land Use Impacts of Biofuels

Well its a better argument than the one's we faced with Food vs. Fuel. Its logical and seems to be more results oriented. Hopefully this is a fair debate that moves us beyond the bullet-statement and bumper sticker arguments around ethanol.


From OPISnet.com

BIOFUEL GROUPS CONTINUE TO OPPOSE INDIRECT LAND USE INCLUSION IN RFS

Industry sources continued this afternoon to sift through the voluminous 1,004-page notice of proposed rulemaking for the expanded renewable fuels standard (RFS) that U.S. EPA issued this morning, but it appears as though while biofuel advocates appreciate the establishment of the Biofuels Interagency Working Group, they still oppose EPA's inclusion of indirect land use (ILUC) in the agency's establishment of lifecycle greenhouse gas emissions.

As passed under the 2007 energy bill, the 36-billion gal/yr RFS is broken into four segments: a capped corn-based ethanol requirement of 15 billion gallons by 2015; 21 billion gallons of the overall mandate contains "advanced biofuels" by 2022, with 16 billion gallons of that amount, under the same timeframe, from cellulosic biofuel. For the fourth carve-out, up to 1 billion gallons by 2012 is required to be from biomass-based diesel.

Meanwhile, conventional biofuels would be required to emit 20% fewer lifecycle greenhouse gas emissions (GHG) compared to gasoline, while "advanced biofuels" would be required to emit 50% fewer lifecycle greenhouse gas emissions and cellulosic biofuel would be required to emit 60% fewer emissions.

In this morning's notice of proposed rulemaking, EPA included emissions from ILUC in its lifecycle requirements, much to the chagrin of the biofuels industry. Biofuel groups, agricultural academics and some lawmakers had asked EPA to delay the ILUC requirements until there was a generally accepted method for determining the regulation.

"If you look at the direct impact of ethanol, from the production of the grain to transportation to the facility to the process of making the ethanol to transporting that to market, there are significant benefits to ethanol over petroleum," about 61% lower than petroleum fuels on average, said Renewable Fuels Association President Bob Dinneen, speaking on a conference call with reporters earlier today. However, "there is so much uncertainty" when trying to factor indirect effects, he said.

Additionally, the proposed ILUC requirements are not being uniformly applied, since there is no similar provision for petroleum production, Dinneen noted. "You'll see no international indirect effect of petroleum applied. EPA should've looked at this when they were creating the baseline. They are willing to count the number of angels on the head of pin for biofuels, [and] they ought to give more than just a cursory look at petroleum production," he said.

But Dinneen said he was pleased EPA would specifically be soliciting scientific feedback and peer review on the ILUC proposal.

Similar comment came from other biofuel groups, including Growth Energy, POET, the American Coalition for Ethanol (ACE), Biotechnology Industry Association and Brazilian sugarcane trade association UNICA.

"As evidenced by the recent debate over the low carbon fuel standard in California, biofuels are greatly penalized by these preliminary calculations,"
said UNICA Chief Representative in North America Joel Velasco. "We know sugarcane ethanol has the lowest carbon emissions of any liquid biofuel produced today. California recognized as much in its low carbon fuel standard.

We are certain that when the EPA considers the best available data and research, these indirect land use effects from sugarcane cultivation in Brazil will be marginal at best," he added.

Meanwhile, the National Biodiesel Board said that a final EPA rule on indirect land use changes "that is based on questionable science and is structured in a manner that restricts the role of sustainable vegetable oils in the program will make it nearly impossible to meet the Advanced Biofuels goals established by statute," according to NBB Vice President of Federal Affairs Manning Feraci. "Hopefully, common sense will prevail in this process and the EPA will issue a workable final rule that is based on sound science and allows the U.S. biodiesel industry to make a positive contribution to the RFS2 program," he added.

Brian Jennings, executive vice president of ACE, said he was pleased that USDA Secretary Tom Vilsack will be co-chairing the Biofuels Interagency Working Group along with the heads of DOE and EPA. "I think this means ethanol remains at the table for the president's energy policies moving forward, despite the political desire of some to box ethanol out. I think the working group will ensure that fossil fuels are finally examined along with biofuels in these LCA [land use change] assessments," he added.

The Natural Resources Defense Council (NRDC), meanwhile, is pleased with the inclusion of the indirect land use provision. "We must develop biofuels the smart way, and we are encouraged that EPA Administrator Jackson has offered a science-based proposal to get this done," said NRDC's Nathanael Greene. "The opportunity to review EPA's proposal will help ensure that developing biofuels won't mean using our most fragile forests for fuel and that biofuels provide real benefits. We plan to submit comments on what EPA has gotten right and what must be improved to make sure the outcome serves our environmental and energy needs," he added.

While both the American Petroleum Institute and the National Petrochemical & Refiners Association were still reviewing the proposal, they are concerned with the availability of biofuels that will be needed under the RFS. "While NPRA looks forward to commenting more specifically on the proposed guidelines, the questions of commercial viability, product liability and the lack of adequate scientific review with regard to mandated increased quantities of ethanol remain unresolved," said NPRA President Charles Drevna. The association said it trusts "that EPA will seriously and transparently consider the concerns raised by fuel, public health, environmental, and engine manufacturing interests as it proceeds toward finalizing guidelines for RFS implementation."

Similarly, API spokesman Karen Matusic said it is "surprised and disappointed" that EPA, in relying on industry information, believes there are sufficient plans underway to build plants capable of producing 100 million gal of cellulosic ethanol in 2010 and are therefore not proposing to waive the requirement for next year. "The waiver criteria is not 'plans to build,' but is 'projected volumes of cellulosic biofuels production," she noted. "Information readily available to the government clearly shows that very little cellulosic biofuels will be produced in 2010," she added.

Meanwhile, anticipating that ILUC would, in fact, be included in EPA's proposed rule, U.S. Sen. John Thune (R-S.D.) introduced legislation last week that would direct EPA to only focus on the direct lifecycle greenhouse gas emissions in its regulation. Speaking on the conference call this morning, Dinneen said these and other congressional efforts are separate from EPA's peer review efforts and aren't likely to be withdrawn.

Once EPA's proposal is published in the Federal Register, the agency will begin to accept public comments for 60 days. Meanwhile, EPA plans to hold a workshop on June 10-11 at the Dupont Hotel in Washington, D.C., to present details of the lifecycle GHG analysis included in the proposal.

For more information on the proposal, visit:

http://www.epa.gov/otaq/renewablefuels/index.htm#regulations.
--Robert Gough, OPISnet
--Rachel Gantz, OPISnet