The New Dynamic in Global Oil Demand

The average American is paying 13 cents a gallon more for gasoline than he did a week ago. Gasbuddy.com says the national average price for regular unleaded is $3.67.

A barrel of oil goes for $108.33 this morning — up nearly $12 in February alone.

There is, of course, a “fear premium” caused by the prospect of a new war… and an “inflation premium” caused by the Federal Reserve’s monetary promiscuity…

But there are some more onerous factors at work, too. Bureaucracy among them.

A word of warning, if you’ve got any strains of “free market” blood coursing through your veins, be prepared for those platelets to begin boiling…

“In North America,” Byron King explains from his perch in Pittsburgh, “refiners are already processing summer blends of gasoline that meet ‘clean air’ mandates. There are a multitude of blends, each required in a specific region.

“You can’t sell ‘Chicago’ gasoline in Philadelphia, for example, or ‘Seattle’ gasoline in Los Angeles. The US is a patchwork of chemically dissimilar fuel blends. It makes for a logistical mess, having to transport specific blends to specific regions.

“That, and every year, we see a late-winter or early-spring spike in oil prices because the ‘clean air’ gasoline blends require more oil as feedstock. That is, ‘clean air’ reduces refinery yield.

“So perhaps we have ‘cleaner’ air (and perhaps not), but at a significant overall increased cost at the pump.”

One more less-onerous, less-predictable factor leading to hire gas prices: Europe’s bitter-cold winter.

“You may be tired of reading about economic issues in Greece and Italy,” says Byron, “but that doesn’t mean that they’re not still using oil when it’s cold.”

On a related note: All but three of Japan’s 73 nuclear reactors remain offline after Fukushima. “The Japanese,” says Byron, “are using more oil to generate electricity and run their industries.”

And that’s on top of China’s exploding consumption. “Just take a look,” says Byron, “at one trend that’s driving demand (so to speak), namely the skyrocketing numbers for vehicle registrations in China. There’s huge growth.

“The only limiting factor for China will be the world’s future oil supply — or I should say China’s future oil supply from the rest of the world.”

In the face of these factors, falling US demand and rising US supply become irrelevant. “You compete for your gallon of gasoline with people from every other nation across the world,” says Byron, returning to a theme from last week.

“That is, it’s ‘your’ gallon if you can afford it. When the price of oil goes up and the other issues are factored in — like a cold winter in Europe, and rising Asian demand — the US demand decline pales in significance.

“The bottom line is to expect higher oil prices over the next few years, and higher pump prices as well. Sure, we’ll see oil prices rise and fall, because nothing goes up in price forever (except for the cost of medical care and college educations in the US, perhaps).

“But you had better get used to living with oil price volatility and prepare to live your life accordingly.”

And invest accordingly.

“There’s no doubt there’s an energy surge in Washington County,” says Jeff Kotula, president of the Washington County, Pa., Chamber of Commerce.

Washington County is smack in the middle of the Marcellus Shale. The Chamber is bragging about 45 economic development projects during 2011… and 24 of them were energy-related. The county is third in the nation in employment growth.

County Commissioner Harlan Shober got a chuckle during a news conference yesterday when he mentioned Gasland, the documentary that’s highly critical of the “fracking” process that pulls shale gas from the earth. “Washington County could also be called jobland,” he said.

Add Washington County to the long list of US communities seeing a revival thanks homegrown natural gas and oil.

Addison Wiggin
for The Daily Reckoning