Despite Syrian Crisis, Drivers
Don't Need to Fear $4 Gas...Yet
By Matt Egan
Published August 28, 2013
FOXBusiness
It’s only been a few days since a clash with Syria looked imminent, but the
looming military conflict has already sent jittery oil prices beyond $110 a barrel to
fresh two-year highs.
Nervousness about the fallout of the conflict is set to trickle down to American
drivers in the form of moderately higher gasoline prices just as they kick off one of
the busiest driving weekends of the year.
However, the impact will likely be limited and $4-a-gallon gasoline is seen as
unlikely, at least so long as the situation in the Middle East doesn’t spiral
completely out of control.
That’s because Syria isn’t a major oil producer, the domestic supply-and-demand
situation doesn’t seem to support substantially higher prices and the U.S. still has
the 700-million barrel Strategic Petroleum Reserve in its back pocket.
“We are much more insulated vis-a-vis global oil price shocks than we were
during the first Arab Spring,” said Tom Kloza, chief oil analyst at GasBuddy. “I
think the outlook for gasoline still suggests ‘temperate prices’ through the end of
the year, despite the very high crude numbers.”
That’s not to say gasoline prices and other petroleum products won’t experience
at least a short-term bump.
According to AAA, the national average price of gasoline ticked up to $3.546 on
Wednesday from $3.542 on Tuesday and $3.533 a week ago. Yet gasoline prices
remain below the year-ago level of $3.756 as domestic supplies continue to be
padded by the ongoing shale boom.
“I don’t think we’re going to go to $4 unless this thing really escalates,” said Darin
Newsom, senior commodities analyst at DTN, who sees only an “outside chance”
of emotions pushing prices that high.
Newsom predicted the average price of gas could climb another 20-30 cents to
about $3.85 a gallon, an increase that could crimp discretionary spending just as
the U.S. economic recovery continues to struggle to gain steam.
‘Nowhere Near as Vulnerable’
After soaring $3.09 a barrel on Tuesday, crude jumped another $1.09 on
Wednesday and closed at $110.10 -- its highest settle since May 2011. Crude
closed well off its intraday high of $112.24.
“Every geopolitical event that has occurred over the last ten years or so has seen
a similar market reaction. Normally once the event happens and it seems that it is
of short duration markets tend to revert back to more normal value trading
levels,” Dominick Chirichella, founding partner of Energy Management Institute,
wrote in a note.
American drivers have a number of factors going in their favor in terms of
gasoline prices.
For starters, unlike Europe, the U.S. is not nearly as reliant on Middle Eastern oil
as a few decades ago. While the U.S. imports about 1.1 million barrels of oil a day
of Saudi crude and another 750,000 bpd from Iraq and Kuwait, those numbers are
dwarfed by the 10 million bpd from domestic production and our friends in
Canada.
Domestic supplies have benefited tremendously from the shale boom, which has
helped boost U.S. production by about 2 million bpd from the first quarter of
2011.
“We are nowhere near as vulnerable as we were in 2003 or 1990,” said Kloza,
referring to the beginning of the last two wars in Iraq.
It’s also worth noting that Syria is not a major oil producer, nor is it a major transit
point for oil and gas exports like Egypt. The country has been producing about
50,000 bpd and hasn’t been able to export any oil since being slapped by
international sanctions near the end of 2011.
At the same time, seasonal factors are likely to play a role as gas prices tend to
trade at about par to crude prices during the fall, versus at a premium leading up
to the peak summer months.
After the key driving holiday of Labor Day, Kloza estimated gasoline demand will
tumble about 300,000 to 400,000 bpd, removing further pressure from the
energy markets.
The 700M Barrel Question
Energy traders will be watching closely to see if the U.S. begins hinting at a
decision to tap the SPR, which holds nearly 700 million barrels of crude, more
than earlier crises. Kloza said that amounts to about 140 days of supplemental
supply if every country except Canada refused to sell to the U.S.
Asked about the potential of tapping the SPR, a senior Obama administration
official told FOX Business: “We are continuously monitoring the global oil supply
and demand situation.”
The White House last decided to unleash the SPR during the Libya crisis in 2011,
selling 30.64 million barrels of crude from the reserve.
Chirichella told FOX Business he believes the U.S. will tap the SPR if there is a
military strike on Syria, a move that would immediately send prices lower.
Others believe such a move would be premature, especially if some of the
political calculations are removed from the equation.
“From a purely analytical point of view, I don’t think there’s a reason to do it,”
said Newsom, citing the supply-and-demand situation.
For all those reasons Kloza said the “odds favor temperate or perhaps even
lower” gas prices through the end of 2013.
Of course, predictions for a limited boost to oil prices could quickly be proven
wrong by an escalation of the conflict in Syria. Such outcomes could include
violence spilling over into neighboring countries, a more intense intervention by
the U.S. beyond surgical missile strikes or even a broader regional war.
FOX Business reporter Sandra Smith contributed to this report.
http://www.foxbusiness.com/markets/2013/08/28/despite-syrian-crisis-drivers-dont-need-to-fear-4gasyet/#ixzz2eLKEK8Sv
Questions:
1. Why would US involvement in the war in Syria cause oil prices to rise?
2. Name two reasons this article presents for gasoline prices remaining under
$4/gallon.
3. Why does the price of gasoline often fall after Labor Day?
4. What is the Strategic Petroleum Reserve and how might it affect the price
of gasoline?
5. How does the price of oil affect an entrepreneur running a small business in
Northern Monmouth County?
6. What technology breakthrough has caused the price of oil to be cut in HALF
since this article was published?