Leading Oil Industry Executive Alan Gaines speaks on Obama and Oil Reserves.
Alan Gaines was Chief Advisor to financier Carl C. Icahn in all of Mr. Icahn's investments within the energy space, including such highly publicized forays as Texaco, Phillips Petroleum, Unocal, United States Steel (Marathon Oil), Tenneco, Williams Cos., Western Company of North America, etc..
Connect with Alan Gaines on Twitter http://www.twitter.com/#!/AlanGaines
US President Obama and British PM Cameron are considering releasing oil from strategic petroleum reserves, do you think it is necessary at this stage to tap reserves?
I personally do not believe that sovereign nations should play pretend crude oil traders. The Strategic Petroleum Reserve should be utilized only for national emergencies.
Mr. Obama is using the SPR for his own political gain, attempting to jawbone lower crude prices, and therefore gasoline costs, to the consumer. All this will serve to do is to temporarily lower the market, primarily for hungry Asian buyers such as China. Mr. Obama's approval ratings have come under pressure due to higher gasoline prices, which have hit seasonal highs.
The White House is desperate to prove to frustrated consumers that it is doing all it can to keep fuel costs in check. Crude oil prices have risen by almost 17% this year, as EU and US sanctions against Iran have choked off supply from that country. It must be mentioned that the US sold crude from the SPR last June after the outbreak of the civil war in Libya. It didn't work then, and will not work now.
UK Chancellor of the Exchequer George Osbourne said yesterday that rising oil prices are something all economies will be concerned about. At what price point do you see the US Oil Price lowering US GDP.
As higher crude prices impacts the downstream price of gasoline, diesel, heating oil, and other refined petroleum products, that in turn forces consumers to shift discretionary spending away from big ticket durables purchases (automobiles, furniture, etc.). Higher oil prices also crimp consumer purchases of nondurables, such as clothing, travel, and entertainment. Therefore, lofty oil prices act as a tax of sorts on consumers, and most of those dollars move out of the United States.
Consumer demand for gasoline is the most significant end use category. American consumers purchased 172.2 billion gallons of gasoline in 2011, expending more than $400 billion, excluding federal and state taxes. Each $0.50 cent per gallon increase in the retail price of gasoline adds almost $60 billion to annual consumer bills, essentially what has occurred of late. In the short term, the price elasticity of demand for gasoline is fairly inelastic, but that changes over the long haul.
Case in point: Consumers have adjusted personal spending patterns on gasoline since the 2007 spike in prices. On a per capita basis, consumer demand has fallen from 610 gallons in 2006 to about 550 at the end of 2011, or, a reduction of almost 10%. Overall, gross consumption of gasoline is down by nearly 7% over the same period.
A $10 per barrel rise in crude oil prices has a surprisingly relatively small impact. On an annualized basis, that $10 per barrel increase lowers GDP growth by 0.2%. The impact on consumption spending is twice as large at 0.4%. Investment growth falls by just 0.2%. The psychological impact might be quite another story. I believe that an increase in WTI to $130 per barrel ($150 for Brent) are necessary before the probability of a US meaningfully slower growth, with a recession likelihood being even money. EU growth, already quite strained, would also be significantly impacted.
President Obama is publicly blaming Mideast tensions, big oil price gouging, and economic factors he inherited from George Bush. His Energy Secretary, Steven Chu, is on record saying, Somehow we have to figure out how to boost the price of gasoline to the levels in Europe. In a report published by the Wall Street Journal in 2008, Chu explained that in order to wean Americans off gasoline, the administration should make them punitively pay at the pump. Is this what we are seeing in America right now?
Americans are accustomed to cheap gasoline. Prices in Europe, for example, have been relatively high for decades. In France, for example, gasoline prices have climbed to more than 2 euros per liter, or approximately $10.50 per gallon. So, about three and a half years post Mr. Chu's remark, his prophecy is coming dangerously close to reality. However, during a Senate Energy and Natural Resources Committee last Tuesday, Sen. Mike Lee (R-Utah) asked the Energy Secretary whether he still favors European level gasoline prices. After a long, uncomfortable pause, Mr. Chu replied, I no longer share that view. A good pre-election statement by President Obama's loyal foot soldier.
Americans will not be weaned off gasoline powered motor vehicles any time soon. The only way to make sure supply is consistent (if not actually increasing)consistent, and not overly expensive, is to encourage drilling, for example allowing drilling in ANWR and other potentially high impact provinces in the US. Big Oil needs to drill, drill, drill.
Shayne Heffernan oversees the management of funds for institutions and high net worth individuals.
Shayne Heffernan holds a Ph.D. in Economics and brings with him over 25 years of trading experience in Asia and hands on experience in Venture Capital, he has been involved in several start ups that have seen market capitalization over $500m and 1 that reach a peak market cap of $15b. He has managed and overseen start ups in Mining, Shipping, Technology and Financial Services.