The Staton Jones Report

Damn, how 'bout that crazy price of oil, eh?

Despite OPEC's announcement yesterday that they would consider raising output, I am highly skeptical that any actual change in production will be realized. Most likely, what we will see is a modification of OPEC's price target, and perhaps a slight increase in output quotas.

But, these changes mean nothing. The only thing that will have any effect would be more oil. So, since Saudi Arabia is the only OPEC member to claim any real spare capacity, perhaps we will see whether they really can increase output like they've been assuring us all this time. My prediction is, though, that they won't, because they can't. I think they're maxed out, capacity-wise, and the loss of western workers due to safety concerns can't be helping. So, while there'll be all sorts of blustery talk of raising this price band or that output quota, which will play all sorts of havoc with the hyper-volatile price of oil, don't look for Saudi Arabia to make any promises of significantly increased output, let alone actually increase their output.

And, even if they could increase output, it would have little effect on the price of gasoline in the U.S., as refiners, having retooled to produce our special, more expensive "environmental" formulations of gasoline, are already running at near full capacity. Gasoline demand is on the rise, and gasoline stocks are low. There are very few sources from which we can import gasoline that meets our stringent formulation requirements, and the domestic refining industry, having incurred the expense of retooling, is unwilling to let the EPA relax its requirements on imported gasoline formulations, as that would put them at a competitive disadvantage. While Democrats may find political leverage in urging the President to release oil from the National Strategic Petroleum Reserve (NSPR), it really wouldn't serve much practical purpose to do so.

My feeling is that our oil situation is critical beyond belief at this point. And, one would imagine that the likes of Al Qaeda must know this. All it would take is one lunchbox packed with C4 at one of the major oil processing terminals in Saudi Arabia to bring the U.S., and the world, to its knees economically.

Luckily, we've been able to depend on abundant natural gas!

Andrew Weissman, Publisher of EnergyBusinessWatch.com, writes on EnergyPulse.com that the prices of natural gas, contrary to what economists might predict, have significant upside potential over the remainder of the year. Interesting to read that our stalwart supplier, Canada, is unlikely to meet U.S. demand for natural gas. This seems an ominous sign to me.

What I find a little interesting is that, while I have long predicted increasing natural gas prices, my reasoning was based on presumed shortages resulting from increased demand from the 200,000 MW of new gas-fired power plants that have been built over the past five-ten years. But, it turns out that these new plants remain idle -- because of the high cost of natural gas.

Thank god, we have coal to save us!

Reuters reporter Steve James, writing in Forbes, has recently reported on the low coal inventories of U.S. power plants. Coal demand is up significantly due to increased steel production to satisfy industrial growth for both a recovering U.S. economy and, perhaps even more important, booming demand for U.S. steel in China. Power generators typically store their own purchased coal for later use, but with higher coal prices, they have chosen to wait, gambling that the price will come down.

To make matters worse, the U.S. rail industry has fallen into neglect in recent years, and currently have their hands (and railcars) full supplying transport of coal to steel plants, and steel to port. If the power companies suddenly decided to bite the bullet and buy the coal they needed to satisfy demand, perhaps because they realized their gable wasn't going to pay off, physically getting the coal to their plants will be a challenge.

Luckily, our oil-rich pals in Iraq are going to help us out -- all according to plan, eh?