Radical Noesis - Thinking outside the box

There is a nice article by Ben on the Watt on the IEA offer in the wake of hurricanes Katrina and Rita. They agreed to release 60 million barrels over 30 days in the form of roughly 1.3 mbd in crude and .7mbs in refined product. According to the IEA press release, the sources of that contribution "consists of 94% stockdraw, 3% demand restraint and 3% increased indigenous production. " This would, in part explain why the cost of product is going up globally. The reserves of IEA nations need to be replenished, and most of the release is from the reserves. "Demand restraint" is a nice way of engaging in policies that decrease demand - namely take up the price of fuel so people drive less.

The release started sometime early in September. It should have stopped some time in October (with the exception of the additional contribution from Japan). To the best of my knowledge, Gulf of Mexico supplies are still over 50% shut down or shut in, and U.S. production is still down by 1 million barrels a day.

Based upon the issue of global supply and demand, and the continued impingement of US Gulf production, then the declining prices should start climbing back up - unless another mechanism is at play. According to the Energy Information Association of the U.S. Department of Energy, Retail Gasoline Historical Prices - Regular the average U.S. gasoline price for October 31, 2005 was $2.48. On August 22, 2005 (before Katrina hit) the average price was $2.58. The October 31st price was still 44 cents higher than at that time the year before.

Sometime, and likely soon, the generosity of the IEA is going to come home to roost. The release of roughly 60 million barrels of crude and refined product was not a gift - it was a loan. That is a loan that will need to be repaid. That price hit will combine with the ongoing reduced production which affects not just the United States, but the global availability of oil. This may, in part, why Matt Simmons is predicting that oil could go to $190 a barrel.

The presentation of a rosy economic picture (Economy Soars Despite Hurricane Disasters,) in the United States is pretty bogus - all things considered. As is the claim that high energy prices are holding down job growth. The loss of almost 600,000 jobs due to the destruction in the Gulf, and the immigrant labor in the cleanup and rebuilding, do not help the picture. Given that the oil prices in the U.S. have been moderated by the IEA's actions, attributing job loss to high fuel prices rings a bit hollow. However, it may be prescient. When the oil loan program comes home to roost, then prices are likely to go up dramatically. Job loss will certainly be one of the impacts of "high oil prices." Unless there is another invisible hand in the mix.

I still have a squirming suspicion that behind the scenes money is going into this system to drop the cost of gasoline in the United States. While demand goes down in the U.S. in the winter, the price goes up due to special winter formulations to decrease air pollution (even though Bush put some of those controls in abeyance). The difference is being made up somewhere; I just don't know where. Wherever this suspected invisible hand is, the invisible pocket will not keep up the dole for long. There is just too much profit to be made.

Maybe I am just getting overly suspicious of the behind the scenes activities of the Bush administration and its corporate cronies. Maybe it all is as straightforward as EAI reserve releases and decreased demand. Maybe the whole issue of tight supply in a growing demand environment has no impact on the cost of oil. Maybe, but personally, I am waiting for the other shoe to drop.