The price of oil is retracing its 2004-05 climb rather quickly of late. While some of the rise in oil prices relates to supply concerns from Nigeria and a perceived stabilization in the economy, it is also linked to a falling dollar.
Today, the oil price convincingly passed $60 per barrel as the dollar fell to $1.377 per euro (10% weaker than its peak several weeks ago). Oil had previously touched $60 before retreating during the last few days. But this time, a weekly report from the US Energy Information Administration (EIA) showed a larger drop than expected in US inventories of crude oil, at 2.1 million barrels or .6%. This drop followed a bigger 1.2% drop the week before. Therefore, even though oil storage levels remain above average, the emerging trend of decline has caused speculators to bid the price up.
Gasoline May Spike to $2.50
Gasoline storage levels fell 2.1% to below the average range, its second big drop in as many weeks. With prices now at $2.33 per gallon and wholesale prices that translate into $2.50+, we are likely to see a continued spike in gasoline’s price in the week ahead. In fact, without extremely bad economic news derailing the rally – average gasoline prices seem destined to rise above $2.40 and toward $2.50 soon.
Lower Imports & Lower Demand
Crude oil imports averaged less than 9 million barrels per day (Mbd), down more than 5% from last year. But this still isn’t a problem for the short-term because inventories are so high and recessionary demand remains more than 5% below 2008 levels. Last week’s demand for gasoline, distillates, and propane fell 1.4%, 13% and 4.7%, respectively. The timing and speed of economic recovery along with the pace of oil field decline rates will determine prices going forward.
Fuel Efficiency Crucial
Obama’s announcement yesterday to raise fuel efficiency standards in the US market to 35.5 mpg by 2016 was a great step forward. The Union of Concerned Scientists estimates this policy will save Americans at least $30 billion dollars per year (reduced gasoline expense, etc.) in 2020 based on a gasoline price of just $2.25 per gallon. The efficiency standard will also lower our oil import needs by 1.4 million barrels that same year (enough to replace dwindling shipments from Mexico).
Bottom Line: A focus on efficiency will be crucial to keep our economy from suffering an even worse oil shock than 2008 in the years to come. This same efficiency is a big part of the climate mitigation effort we need to deploy in the US and worldwide. Solid policy like strengthened fuel efficiency standards accelerate the Sustainable Energy Transition, helping our environment and our wallets simultaneously.