• Consumers And Volatile Oil Prices

Consumers across North America daily check the wildly fluctuating prices of gasoline at their favorite neighborhood stations. Magically, prices change at all pumps in unison. Just as strangely, pump prices have not dropped in step with the currently defeated price of crude.

Price of crude oil today floats around USD$35 per barrel, down severely from a high of over $147 only months ago. You don’t require a calculator to realize that the current price is now at approximately 24% of it’s high which is not reflected in your wallet’s hemorrhage as you fill-up. You drive off disillusioned and frustrated, but you feel less anxious than you did following your recent summer fill-ups during the oil speculation frenzy. You hear rationalizations like, “OPEC is contracting its output by 2.2 million barrels per day,” or you read, "... global demand is expected to shrink by about, …" well it doesn’t matter, you just know that you and millions of gasoline consumers are at the front line of this commodity’s implications on the future. What can you do? What will you do?

It would be easy to blame oil industry conspiracies for the wild ride of oil pricing. Reality is that stakeholders directly or indirectly connected to the industry are simply doing what is necessary to extract as much money as possible out of their respective positions. Each is being human. Expectations of high returns currently includes “hoarding.” At least this is the prevailing clairvoyance of astute speculative bets. Keep that one in mind.

To shatter more assumptions and agitate matters further, hoarding has exacerbated the impact of refinery output reduction. Refiners had curtailed operations, contemplating drops in demand. The resulting confusion ignited volatility in prices to frenetic levels. Such volatility is not constructive to the overall long-term health of the exploration and refining sectors of the industry. Uncertainty in oil prices is also not therapeutic to an ailing economy.

Crude reserves are bursting the capacities to contain them onshore to the point where storage availability has become scarce, and oil filled tankers are sitting afloat offshore, awaiting a more favorable price day. This is a calculated measure to apply pressure on the outcome of pricing speculation. This strategy expects a global economic recovery. Should that not occur, the tactic hopes that a depletion in refined oil might eventually bring back prices of $60 or even $70 per barrel. These are the price levels that many oil resource dependent economies require if they are to escape overwhelming deficits. How can a Middle East monarch possibly retain power over a semi-suppliant population, building palaces, ordering 400-foot yachts, and over-fitting Airbus A380s on $35 oil? Can’t do it. Something or someone has to give.

Here we are in the middle of a cold winter, yet consumer demand for oil continues to drop. Diligence with home thermostat settings has had a direct impact on consumption. “Travel” reduction has also cut a deep gouge into supplier assumptions. Overall reduction in consumption of all goods affects the price of oil negatively, and consumers should remain vigilant. We should all maintain our current frugal attitudes toward accumulation of all things not grown in soil. The speculative bets made against the consumer, may turn to bite the hands that placed them.

The OPEC cartel and other oil producing nations will continue to be conflicted. They are each competing for a piece of the consumer’s oil dollar. Since each barrel of oil finds its own independent path to market, the Saudi barrel will always seek a position on the delivery system ahead of the Venezuelan barrel, which will itself attempt end-runs on the Nigerian barrel coming across the ocean. Current prices have also macerated attitudes like those of Venezuelan Strongman and part-time Latin American hero Hugo Chavez, who is now soliciting help (read begging) from the major oil companies he not so long ago demonized and seized assets from. Evidently there is no persuasive Spanish translation of the adage about “burning bridges” he is familiar with.

The outlook on oil prices may be uncertain, however, there is one enduring certainty world markets can rely on, … the consumer will persist as the arbiter of good taste on conscientious consumption. The consumer will continue to command oil price trend direction. Should current tendencies persevere, and consumers stay the course, chance will be infinitely more accommodating to the reality of an economic recovery within the next eighteen months.