Bullish Geopolitics Overpower Bearish Gasoline Demand

By Brian L. Milne, Refined Fuels Editor, Telvent DTN

The Energy Information Administration’s (EIA) U.S. average price for regular grade gasoline spiked to a $3.721 gallon 8-1/2 month high on Feb. 27, and is poised for a further advance despite mixed wholesale costs in early March. Retail prices have never been this high this early in a calendar year, and the run-up is now provoking comparisons with the infamous price spike in 2008 to the $4.114 gallon all-time high reached in July of that year and ahead of the credit crisis and the worst days of the Great Recession.

The price surge is also coming in front of an historic presidential election in November, and there are increasing calls for a political response to this economic issue, understanding voter’s angst to high gasoline prices. One suggestion would be to draw from the Strategic Petroleum Reserve, which has 696 million barrels of crude oil. The SPR was last drawn on in 2011 during an international effort to offset lost crude oil production from Libya at the time during their civil war.

View Telvent DTN’s Weekly and Historical Gasoline Price Index.

The early 1970s Arab oil embargo that prompted gasoline rationing in the U.S. gave birth to the SPR. Other countries have strategic reserves as well, with members of the International Energy Agency, which the U.S. is part of, requiring county members to hold supply of crude or finished products such as gasoline in reserve in the event of a major supply disruption. In addition to last year’s draw on strategic reserves, the IEA coordinated with its members to release supply to the U.S. following hurricanes Katrina and Rita.

The SPR however is meant only to be tapped in the event of a supply disruption. The strategic supply is not meant to be used to lower fuel prices.

Domestic Solutions?
Meanwhile, the U.S. has an increasingly growing supply of oil in its heartland, benefiting from hydraulic fracturing that has unearthed a light shale oil in places such as the Bakken formation in Montana and South Dakota, and from greater amounts of oil sands from Canada. The oil is mostly landlocked, available only to Midwest refineries outside of oil barged down rivers or railed to Louisiana for instance.

Several features have underpinned the 2012 rally in gasoline prices, including an improving outlook for the U.S. economy. Meanwhile, global oil demand continues to rise despite lower consumption in Europe and weak demand in the U.S., driven by emerging economies in Asia and South America. What was seen as a sufficient buffer in spare capacity has also narrowed amid conflicts in Syria and Sudan.

Clearly the biggest driver has been the increasing rhetoric surrounding Iran and what Western nations believe to be the country’s drive to nuclear weapons, which it denies. Iran has threatened to close the key shipping lane the Strait of Hormuz should it feel threatened, while a military strike against Iran’s nuclear facilities has not been ruled out by the United States.

The anxiety created by this scenario might linger for weeks or longer, and was on full display on March 1 when there were false reports of a pipeline explosion in Saudi Arabia, which has promised to plug any shortfall of Iranian oil. The markets spiked on the news before the reports, which came from an Iranian news service, were later determined to be false.

Meanwhile, gasoline demand in the U.S. is lower than at any time in more than a decade. During the first eight weeks of 2012, gasoline demand is down 6.9% against the same timeline in 2011 according to data from the EIA.

About the Author
Brian L. Milne is the Refined Fuels Editor for Telvent DTN—a leading business-to-business provider of real-time commodity information services. Milne has been focused on the energy industry for 16 years as an analyst, journalist and editor. He can be reached at brian.milne@telventdtn.com.

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