The impacts of higher oil and gasoline prices are beginning to ripple across the economy. Wells Fargo Economics reported today that higher energy prices increased the producer price index (PPI) by 0.4 percent in February 2012 which was the highest monthly gain in the PPI in five months. Wholesale gasoline prices were up for the second-straight month, increasing 4.3 percent, home heating oil was up 5.3 percent and residential electric power prices increased 0.6 percent.
The growth in domestic natural gas production from shales has decoupled natural gas prices from global oil prices as supply exceeds demand helping to mitigate the inflationary impact of oil prices. As a result of the growth in natural gas supply availability, finished goods energy prices increased only 1.3 percent last month which is still a big increase but smaller than oil driven energy price increases.
Wells Fargo laid the blame of rising energy prices on Middle East tensions and said it expected energy prices to remain high in the coming months and warned they could be a significant downside risk to economic growth as those higher energy prices spread across the economy and are embedded in prices.
The only good news in the PPI was food price inflation slowed down again for the third month, with finished consumer food prices down 0.1 percent in February including a 2.8 percent drop in dairy products led last month’s decline, but substantial price cuts were also seen in fresh and dry vegetables, eggs and pork prices bringing year over year, wholesale consumer food price increases to 1.6 percent down from the January pace of 5.1 percent. Excluding food and energy, finished goods prices rose 0.2 percent in February half the 0.4 percent increase of the month before.
The Ugly Politics of Higher Gasoline Prices
Nothing causes election year jitters more than spiking gasoline prices. The occupant of the White House always gets the blame for higher gasoline prices and Americans are cynical in their belief that he can and should do something to bring them back down.
The problem for the President is he has been vilifying the oil and gas companies for quite some time so doing more of the same is unlikely to produce better headlines or lower gasoline prices when he needs it most. Politicians also know but never want to talk about the impact that gasoline taxes have on the price at the pump. And Energy Secretary Chu more an academic than a politician stepped in it big time by speaking his opinion that gasoline prices on par with those in Europe are the fastest way to the clean energy economy the Administration wants to achieve. He has spent the past few weeks trying to scrape that mess off his shoes to no avail besides we all knew that is the view of the Administration as defined by the aspirations of their environmental base constituency.
Even the Sierra Club admitted it had shaken hands with the big energy devil by taking $25 million in 2008 from Chesapeake when it saw an ‘anything but coal’ alliance possibility with natural gas. Now that natural gas is a booming domestic energy production business it regrets the action, but also joined the party of the conflicted as America wrestles with its new de facto national energy policy of substituting clean natural gas for coal and forcing renewable energy to compete with gas for a place in the supply stack.
If only our Presidents had the power to bring down gasoline prices we wish them to have life might be easier—but in the real world the now sitting President’s near term options are limited and he has already played his anti-fossil fuel hand undermining his longer term credibility.
Domestic Energy Production is Growing. US DOE’s Energy information Administration says combined oil production (crude oil and lease condensate) from the top five U.S. oil-producing states continues to grow.
The biggest gains were in North Dakota and Texas, due in large part to increased horizontal drilling and hydraulic fracturing activity. Texas, Alaska, California, North Dakota, and Oklahoma accounted for about 56% of U.S. oil production last year, according to EIA’s February Petroleum Supply Monthly report.
EIA’s highlights from the top oil-producing states in 2011 included:
• Texas. The Eagle Ford shale formation in south Texas contributed to gains in the state’s oil production, which averaged 1,425 thousand barrels per day (bbl/d), the highest level since 1997.
• Alaska. Oil production fell for the ninth year in row, averaging 563 thousand bbl/d.
• California. Oil production averaged 535 thousand bbl/d, the lowest level in at least three decades.
• North Dakota. Preliminary data indicate increasing oil production from the Bakken formation pushed North Dakota ahead of California in December as the third biggest oil-producing state. North Dakota’s oil production averaged 535 thousand bbl/d in December 2011 and 419 thousand bbl/d for the year.
• Oklahoma. Oil production averaged 204 thousand bbl/d during 2011, topping 200 thousand bbl/d for the first time since 1998.”
What the government did NOT say is that most of this increased production is taking place on private lands because the government is actively slow walking permits and environment reviews for additional production on Federal lands. Alaska has more energy production potential but cannot get Federal approvals needed to bring it to market. The other telling message was the stagnation in oil production in California which is making a deliberate environmental choice to live into the clean energy economy. As a result California has record budget deficits, high unemployment, a growing exodus of employers to more business friendly states, and failing schools even while it sits on top of the Monterrey shale one of the potentially most productive sources of new oil and natural gas and gas liquids supplies in the world.
The competitive markets are a cruel mistress. They don’t care whether politicians or potentates like it or not the markets have their way—and ‘the way ‘ appears to be growth in domestic energy production from shales oil and gas as the best balancing of our national interests bringing us more reliable energy supply, lower overall energy prices, more economic growth, more jobs, higher exports and less dependence on Middle East and other imported oil from the crazy and volatile parts of the world.
Why can’t our politicians see this market wisdom of the crowd as a good outcome? We’ll even let them take credit for it if they stop being such obstructionists and just get out of our way.
By. Gary L. Hunt
Gary Hunt is President, Scalable Growth Strategy Advisors, an independent energy technology and information services adviser and a partner in Tech & Creative Labs, a disruptive innovation software collaborative of high tech companies focused on the energy vertical. He served as VP-Global Analytics & Data at IHS/CERA; global Division President at Ventyx, now an ABB company; and Assistant City Manager-Austin Texas responsible for Austin Energy and Austin Water.