engine oil prices
Mexico is the third biggest exporter of oil to the United States. That's bad news for the U.S. economy which always gets hit when oil prices rise.
From 2004 to 2008, the U.S. Department of Energy reports such jolts, along with OPEC price manipulation, cost roughly $1.9 trillion. Plus, a recession followed each major blow.
According to the U.S. Energy Information Administration (EIA), Mexican oil production reached a peak of 3.2 million barrels a day in 2008. And by 2011, it wasn't even producing 3 million barrels a day.
Since then oil production has slipped to 2.5 million barrels a day.
Worse still, Mexico could actually become a net importer of oil within a decade if it cannot find fresh discoveries to make up for the 25% production drop since 2004 and fails to change its current policies.
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Well, not this time.
During the run up to mid-$4 gas and $147 a barrel oil in 2008, many assumed these costs would continue to advance. That made alternative sources - especially renewables such as solar, wind, biofuels, and geothermal - more attractive to investors, politicians, and energy enthusiasts.
Alternative sources are more expensive than conventional oil, gas, or coal. They are, however, more environmentally friendly. Paying those higher costs was regarded as a tradeoff for cleaner energy sources and a reduction in emissions.
Today, that view has changed.
U.S. Oil and Gas Squeezes Alternative Energy ProspectsIt's part of the reason why I've recently avoided alternative energy companies like First Solar (Nasdaq: FSLR), Canadian Solar (Nasdaq: CSIQ) or SunPower Corporation (Nasdaq: SPWR) in my Energy Advantage portfolio.
The economic downturn has made reliance on more expensive energy sources a difficult proposition to accept. Renewables are hardly a convincing argument anymore, especially during a sluggish economic recovery.
Yes, increasing oil and gas prices should reduce the spread between conventional and renewable, thereby providing stronger arguments for change. And proponents argue that alternatives provide an enhanced advantage given that they can also be domestically produced.
Just don't bet on these arguments holding up this time. Here's why.
Releasing oil from the Strategic Petroleum Reserve (SPR).
Trial balloons floated all over Washington during the past few days. The only reason politicians didn't move on this sooner (say a few months ago) was the price level.
Until the last month or so, both oil and gasoline prices were heading in the other direction. Near-month futures contracts for West Texas Intermediate (WTI), the crude oil benchmark traded on the NYMEX, were below $78 a barrel in intraday trade toward the end of June, while the same futures for RBOB (the NYMEX traded gasoline contract) were at $2.55 a gallon.
At the time, all the sage pundits predicted that oil would fall below $60 a barrel; some even suggested that prices could approach $40. On the gasoline side, these same wise guys were proclaiming we may see prices at the pump breach $3.
Everything has changed quickly.
Yesterday morning the markets opened with WTI 23% higher than late June and RBOB up by more than 20%. Oil stands at more than $96 a barrel in New York, while Brent has exceeded $116 a barrel in London. And retail gas prices are once again approaching $4 a gallon.
Recently, I discussed why oil prices are moving up. But for some politicians, including the fellow running for reelection at 1600 Pennsylvania Avenue, those prices are becoming a job liability.
So it's back to hitting the SPR.
But there are four reasons why tapping the SPR won't make oil prices any cheaper in the end.
Maybe you should let your Congressman know about them...
According to the International Organization of Securities Commissions (IOSCO), the current system of oil price reporting is "susceptible to manipulation or distortion."
Comparisons to Libor manipulation have been made because oil prices, such as Brent, serve as a benchmark for trillions of dollars of securities and contracts.
There is the potential for market participants to manipulate oil price assessments published by price-reporting agencies (PRA) through the submission of false information and selective reporting of deals.
Traders at various banks voluntarily report the prices they pay for oil contracts to Platts and other PRAs. Platts, which provides the most influential assessment, uses a number of trades to decide what the benchmark price, quoted to the outside world, should be.
That is where the trouble begins.
Having heard this refrain so many times, I thought I'd dig a little deeper.
After all, a peak of $145 per barrel in the West Texas Intermediate oil price pretty well coincided with the onset of the 2008 recession.
The question is whether or not high oil prices are always correlated with an inevitable downturn.
For instance, when you look closer, oil was not to blame in 2008. Other factors were much more serious culprits, including the housing crisis (by then in market collapse) and the banking crisis that followed.
Between them they are the hallmarks of financial crisis that brought on the nasty recession.
To find out why, we need to do a little arithmetic.
High Oil Prices and the EconomyThe U.S. Bureau of Labor Statistics breaks down personal consumption expenditures (PCEs) on energy versus other items on a month-by-month basis.
The PCE on energy goods (which include natural gas and electricity) rose from 5.05% of total PCE in 2004 to 5.88% in 2007 and 6.31% in 2008. When oil prices peaked in July 2008 PCE hit a maximum monthly level of 7.01%.
Thus taking the increase from 2007 to the highest month in 2008, energy PCE rose by 1.13 % of total PCE, or about $115 billion on an annualized basis.
That sounds like a lot of money, but it's well under 1% of GDP.
For example, it's less than the estimated $152 billion cost of former President Bush's ineffective 2008 tax rebate stimulus.
Indeed, it is one-seventh the size of President Obama's stimulus the following year, which didn't have much visible effect. Thus the high oil prices of 2008 might have made the difference between marginal growth and marginal decline, which according to the "butterfly effect" of chaos theory could have caused other larger changes.
However, high oil prices were certainly not sufficient to push an otherwise healthy economy into recession.