Energy guru: $4 per gallon gas still likely

Energy guru: $4 per gallon gas still likely
Morris Beschloss
Special to The Desert Sun
July 5, 2007

...
An exclusive interview with one of America's leading energy gurus, Phil Flynn, in Chicago last week disclosed the hard facts U.S. oil producers and consumers will be facing this year.
Flynn is vice president of marketing for Alaron, a major energy trading firm.

He has become the "go-to man" on many major networks, including CNBC, MSNBC, Fox and CNN, and the Wall Street Journal and New York Times. I had the privilege of serving with him on an economics TV panel in Chicago prior to settling in the desert permanently a few years ago.

Flynn has been remarkably accurate in forecasting the pricing movements of crude oil and gasoline in the past few years and the reason for their volatility.

His predictions have been so uncanny that he has been approached by major publishers to write a book on the world's worsening energy crisis.

In our dialogue, Flynn blamed the ongoing gasoline and crude oil availability pressure on the following major factors:

U.S. refinery shortages and maintenance problems, which are due to get worse as the year progresses.

OPEC's desire to restrict shipments on what they know is a vanishing resource. The Middle East oil monopoly also is adamant in squeezing the top prices out of its oil availability, realizing that alternative energy sources eventually will cut into crude oil demand.

Saudi Arabia, the only remaining "swing" producer, conceivably could be losing production in one or more of its five major oil fields at this time.


Although crude oil touched $70 per barrel late last week, Flynn believes it should be priced even higher since West Texas Intermediate, which is quoted on the New York Mercantile Exchange, has faced increasing refining blockage. The refinery bottlenecks have caused a crude inventory backup in Cushing, Okla., the nation's main storage area.

As refinery capacity utilization is climbing to the 90 percent plus level, U.S. crude prices will rise to the mid $70 range, while London-traded Brent crude will lag by $2 to $4, the reverse of today's circumstances.

Because the latter is more difficult to refine due to its OPEC-based heavy sulfur content, it will revert back to its historically cheaper price structures.

Flynn attributes California's high prices at the pump to the state's multi-faceted blends, the state's inability to import from elsewhere and the unexpected consumer demand increase this year.

He cites the recent $4 per gallon prices in Chicago to the production breakdown of the major Whiting, Ind., refinery, and the confiscatory Illinois state taxes.

He invites consumers to check the high taxes that federal and state governments charge in these areas to ascertain what gas at the pump really costs.

Flynn believes that the present ethanol approach is an unmitigated disaster.

"Without the 51 cent subsidy," he exclaims, "this unproven energy alternative would be out of business."

Flynn considers Congress' anti-gouging legislation political grandstanding.

Although no apologist for the Big Five multinationals, he believes these major global oil and natural gas producers are beset by government restrictions, political propaganda and an inability to project their strategies through effective communications.

Flynn believes that these international monoliths are less likely to expand refining capacity as government is calling for less gasoline through mandated ethanol blends in future years.

He believes the world's geopolitical situation is getting increasingly dangerous, as the natural resource heavy nations are gaining the upper hand.

Flynn cites Vladimir Putin's Russia, Hugo Chavez's Venezuela and Mahmoud Ahmadinejad's Iran as the new "axis of oil and natural gas evil."

This is not only due to OPEC's price rigging but the loss of technological skills as engineers, geologists and other experts flee these increasingly authoritarian countries.

Even though major new oil fields are being located, Flynn says, the costs of extraction are so prohibitive that countries like Mexico financially are not capable of exploiting them.

By precluding foreign investment in their energy industry, these countries are shutting out the necessary expertise and financing.

Putting his superior forecasting record on the line, Flynn believes that crude oil will reach $75 per barrel this summer and break last year's $78 record if the hurricane season becomes increasingly active.

He adds that "if the geopolitical situation deteriorates," the $85 per barrel mark is a distinct possibility later this year.

With crude oil comprising at least 50 percent of gasoline costs, $4 per gallon at the pump won't be far behind.

"And if the ethanol scam reaches anywhere near its destructive possibilities, look for gasoline to become increasingly expensive," he adds.

When asked what all this would mean to corn-based products in America, Flynn stipulated that such inflationary impact on consumer products would be harshly felt as the year progresses.

With worldwide demand of oil at an all-time high of 86 million barrels a day, according to the International Energy Agency, Flynn concludes that the supply/demand squeeze practically will eliminate the thin margin between production and usage that now exists.

Gasoline $3.20

Some of these latest pieces on Gasoline are getting a little bit dicey. Both Thursday and Friday all network evening newscasts had major stories on the "Pain at the Pump. I'm guessing about the third each night. But it's a reasonable assumption. My DVR only records two channels. So it was ABC and CBS with Katie Couric one night, and ABC and NBC in HD the next. The Big Number was $4.38. I forget which broadcast carried that theory. Anyway, Gasoline is all the rage now. So here's a sampling of what the "experts" are saying.

Stuart Staniford says

So then the question is whether 2mbpd in missing Saudi oil production is enough to account for the $0.70 increase that can reasonably be attributed to crude, rather than refinery tightness. Well, that's a $0.70/$1.90 ~ 35% increase. Given a gasoline price elasticity of -0.05 during the period of interest, it would only take a 35/20 = 1.75% reduction in global gasoline supplies to do the job. Since the missing Saudi production is 2/84 = 2.4% of oil supply, it would appear that, had this not happened, we would have had little or none of the 35% crude-based increase in gasoline prices since 2004.

James D. Hamilton discusses the problems involved in constructing the first new US refinery since 1976 in Arizona.

What if we'd had this refinery's planned 85,000 barrels/day of gasoline online right now? That would represent a little less than 1% of total U.S. demand. In an environment like the present in which refining capacity may be the determining factor driving retail prices at the margin, with a short-run demand elasticity of 1/3, a 1% increase in quantity supplied would translate into a 3% reduction in price, or 9 cents per gallon using the current U.S. average retail price of $3.16 a gallon.

Admittedly, that calculation is a bit misleading, because it ignores the potential significant smoothing of price fluctuations that should come from adjustment of inventories and imports. But it does highlight the fact that, when those adjustments are working imperfectly (as they appear to be at the moment), even one more refinery could make a lot of difference.

Tom Whipple is concerned

The next important point about gasoline stockpiles is that not all of it is useable. As gasoline is largely delivered by pipeline, barge and coastal tankers these days, a lot of gasoline is tied up in transit. Thus the amount of gasoline “trapped” in transport is substantial. This“trapped” gasoline is known as the “minimum operating level.” [...]

If stockpiles – on either coast – drop much more, we are going to find out, the hard way, exactly where the minimal operating level is, for that will be the day the shortages develop. [...]

Total US gasoline inventory increased by 1.5 million barrels last week to 196.7 million barrels, still well below normal and still a cause for concern given the increased demand and the proximity of the summer driving season.[...]

There is still a good possibility of trouble ahead; last week’s stockpile increase certainly was not enough to prepare us for a Gulf hurricane, or any other kind of major disruption, but it may be enough to get us through the first part of the summer driving season without shortages. These issues are how much we continue to consume and whether imports will stay high. We will know shortly. The distribution of the US stockpiles is still not good with the Midwest and East Coast being the most vulnerable to shortages.[...]

Large US imports of gasoline, mainly from Europe, are starting to raise questions. Last weekend gasoline in Germany went over $7 per gallon and analysts are talking about the possibility of $8 gasoline later this summer. The Europeans note that the US is now importing roughly 1 out of every 8 gallons of gasoline consumed and that there is no end to this imbalance in sight. Some Europeans are beginning to ask whether their governments should be taking action to slow the exports to the US.[...]

Tom Kloza says.

I’m still holding to my prediction that we’ll see some moderation or perhaps a “giveback” in retail prices between now and the July 4th holiday. Most of the drops should occur in markets that have the most excessive prices - Oregon, Washington, the Rockies, Great Plains, and Great Lakes states. But once the Weather Channel starts showing those “cones” that indicate the probability of storm paths, we’ll bounce higher on the fear that comes with Hurricane season.