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By Jason Simpkins
Oil prices set a new record just shy of the $130 a barrel level yesterday (Tuesday), despite a concerted – though probably futile – effort by the U.S. government to rein in the runaway commodity.
Crude oil for June delivery reached $129.331 per barrel on the New York Mercantile Exchange, eliciting dismissive comments from industry experts who say the United States attempts to bring prices down have already been checkmated. Indeed, after a series of repeated failures in that venue, it's clear the final United States recourse is to break what President George Bush referred to in 2006 as an "oil addiction."
And that will take years.
Last week, on the same day Bush made a visit to Saudi Arabia, the world's leading exporter of oil announced it would pump an additional 300,000 barrels of oil a day next month. But investors and analysts alike shrugged off the increase as an insignificant, and token action.
"The 300,000 barrels a day hike in June didn't help at all," Eugen Weinberg, an analyst at Commerzbank AG (OTC: CRZBY), told Bloomberg News. "The market is still very robust."
Since the announcement, Saudi Arabian officials, and many of their colleagues in the Organization of Petroleum Exporting Countries (OPEC), have played down the increase, making it clear that they don't intend on taking any further action to boost supply. OPEC president Chakib Khelil said Monday the oil group would make no decision on output levels before a meeting in September.
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"Current prices aren't linked to the law of supply and demand," said Algerian Energy Minister Chakib Khelil, OPEC president, according to government newspaper El Moudjahid.
Khelil forecasts approximately $80 billion in national oil revenues in Algeria for the year.
The U.S. government took another swing at undercutting the price of oil by halting the shipment of oil to the country's emergency stockpile. President Bush signed off on the bill Monday – even though he had opposed it – in the hopes it would somehow soothe investor speculation, but oil prices have continued to advance.
"He remains against it," deputy press secretary Scott Stanzel told Reuters, but "I think he saw the overwhelming numbers of members of Congress who want to attempt to have an impact on prices by stopping the fill of the Strategic Petroleum Reserve."
"Congress keeps… going from Band-Aid to Band-Aid that they think will have an impact but really won't."
Congress had previously applied pressure on the president as he left for Saudi Arabia, by introducing legislation to stop a scheduled arms sale to Saudi Arabia unless the country opened its valves a little wider.
"When the President meets with King Abdullah Friday, we cannot settle for a smile, or a handshake, or even a glimpse into his soul," Senator Charles Schumer of New York said. "We need a commitment to pump more oil. If Saudi Arabia and other OPEC countries do not substantially increase production, we in Congress will block their lucrative arms deals."
Still, neither the Saudi increase or diversion of oil from the U.S. emergency stockpile have taken the sting out of record-high oil prices, which have driven the price of gasoline up for 13 straight days.
Gas prices roared above $3.75 a gallon yesterday, as the average national price of a gallon of regular gas rose 2.6 cents overnight to a record $3.758 a gallon, according to AAA and the Oil Price Information Service. Gas prices are 67 cents higher than a year ago, and are expected to continue rising through the Memorial Day weekend.
Unfortunately, the American consumer – already hampered by a credit crisis, a lack of home equity and soaring food prices – will find no reprieve at the pump, as oil prices seem destined to keep rising.
It was just last week that Goldman Sachs Group Inc. (GS) raised its price forecast for the second half of the year to $141 a barrel. Goldman Sachs analysts had previously quoted a price of $107 a barrel.
That assessment was corroborated yesterday by billionaire hedge fund manager T. Boone Pickens, who said the price of oil would reach $150 a barrel by year's end. Pickens' Mesa Power LLP recently unveiled the first phase of an eventual $10 billion alternative energy project that has the potential to become the world's largest wind farm.
"You find an oilfield, it peaks and starts declining, and you've got to find another one to replace it,". "It can drive you crazy. With wind, there's no decline curve."
Though Pickens once operated one of the largest independent oil-and-gas production companies in the country, he believes it's time for a new energy direction.
"We are going to have to do something different in America," Pickens said. "You can't keep paying out $600 billion a year for oil."
Money Morning Investment Director Keith Fitz-Gerald – a longtime energy bull – thinks prices will ultimately spike as high as $225 a barrel.
That projection represents a revision from a market call he made in December, when crude prices were in the $90-a-barrel range. At that time, Fitz-Gerald caused a stir when he predicted that oil prices were headed for $187 a barrel. He reiterated that prediction back in early March – just before the investment-banking crowd started making their hefty forecasts for oil and gasoline.
With no end in sight for soaring oil prices, the United States finally began working towards a greater level of energy independence with the Energy Independence and Security Act, which mandates that alternative fuels be mixed into the nation's gasoline supply and requires cars to have a fuel economy standard of 35 miles per gallon by 2020.
The act became a law in December 2007 and the effects can already be seen. In the first three months of 2008, foreign oil imports accounted for 57.9% of the United States' oil supply versus 58.2% a year ago. The drop may have been slight but it was the first decline since 1977, the Financial Times reported.
Foreign oil dependency is expected to fall from 60% to 50% by 2015, before rising back to 54% in 2030 according to the Department of Energy.
"The 1970s is the last time we saw any significant decline in net import dependency in the U.S.," Guy Caruso, head of the U.S. Energy Information Administration, told the FT. "It shows that markets do work, policy changes do work, technology does work."
Reducing the amount of oil it imports from overseas seems right now to be the only viable solution to the country's energy conundrum, as oil prices show no signs of abating in the near future.
News and Related Story Links:
- Financial Times:
US begins to break foreign oil addiction
- Thomson Financial:
Algeria's Khelil sees $80 billion in oil revenues in 2008
- Associated Press:
- Money Morning:
Food Prices Soar as Farmers Bail on Corn