Notes from Jim Haughey

Mar 21 2007 12:38PM | Permalink | Email this | Comments (0) |
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By Jim Haughey

Diesel prices are up $0.27 since the beginning of February and gasoline prices jumped about $0.50 in the same short period. This is not the beginning of a new period of soaring energy prices and a large, accompanying cut in spending elsewhere in the economy that will significantly depress the demand for building space and facility capacity. Instead, this is a Katrina and Rita aftershock that will worsen for another month and then fade away over the following few months.

OPEC production cutbacks may have contributed a little to the recent price rises even though OPEC’s intention was only to clear the world market of surplus supply and prevent crude oil prices from dropping well below $50/bbl. as appeared to be the trend in January.

The February-April price spike results from a combination of catch ups in refinery shutdowns for preventive maintenance, cancelled last spring when inventories were too thin to permit many maintenance shutdowns, and the exaggeration of the impact of this small supply reduction on market prices by the partial return of financial speculators to the fuel futures markets. A fe more than normal refinery fires have also contributed. Diesel and gasoline prices rose steeply relative to crude oil prices as speculators bought contracts for future supplies in February that they correctly guessed would be much more valuable in April.

Get used to it. Fuel is now a financial commodity like copper, pork bellies and corn. Price fluctuations will be more frequent and more volatile than the underlying changes in the demand-supply balance for oil and oil products. Enron used to manage this market, buying and selling to minimize price fluctuations just as specialists do on the stock exchanges.

One immediate consequence is that freight costs are now beginning to rise and will stay elevated through well into the summer. Asphalt prices will be affected, both for roofing and paving. The price impact could be substantial since it will include the higher cost of crude oil and refiner preference to make more very profitable fuels and less asphalt. The impact on plastics via petrochemicals will be negative but minor. Natural gas is the preferred petrochemical feedstock. Natural gas prices declined slightly since early February.