December 30, 2011 – Crude Oil Prices exceed $100 a Barrel Again: The United States economy managed to cope this year despite triple-digit prices for barrels of oil. The lessons may come in handy, economists say, because those prices will probably be sticking around.
The monthly price chart above reflects the price of a barrel of crude oil from June, 2004 to yesterday’s close of $103.77/bl. As you can see, the high was $192.27/bl in July, 2008; with the low coming in February, 2009 at $74.83/bl.
With Iran threatening to cut off about a fifth of the world’s oil supply by closing the Strait of Hormuz and unrest in Iraq endangering the ability to increase production there, financial analysts say prices for two important oil benchmarks will average from $100 a barrel to $120 a barrel in 2012, unless Iran attempts to close the Strait of Hormuz.
For consumers, who have been driving less and buying more fuel-efficient cars, weakened demand has helped lower gasoline prices 70 cents since May, to a national average of $3.24 for a gallon of regular unleaded.
Now, though, the focus has turned to Iran. On Wednesday, Iran and the United States sharpened their tone over Iran’s vow to close the Strait of Hormuz if Western powers tried to stifle Iran’s petroleum exports.
The catalyst for the Iranian threats are new efforts by the United States and the European Union to pressure Iran into ending its nuclear program, which Iran has refused to do despite four rounds of sanctions imposed by the United Nations Security Council.
Those sanctions have not focused on Iran’s oil exports. But in recent weeks, the European Union has talked openly of imposing a boycott on Iranian oil, and President Obama is preparing to sign legislation that, if fully enforced, could impose harsh penalties on all buyers of Iran’s oil, with the aim of severely impeding Iran’s ability to sell it.
Rear Admiral Habibollah Sayyari, Iran’s naval commander, said in remarks carried by an official Iranian new site that “closing the Strait of Hormuz is very easy for Iranian naval forces.” Admiral Sayyari, whose forces were in the midst of ambitious war game exercises in waters near the Strait of Hormuz, was the second top Iranian official to make such a threat in 24 hours.
A spokeswoman for the United States Navy’s Fifth Fleet, which is based in Bahrain and patrols the strait, responded: “Anyone who threatens to disrupt freedom of navigation in an international strait is clearly outside the community of nations; any disruption will not be tolerated.”
The Strait of Hormuz, with two mile-wide channels for commercial shipping, connects the Gulf of Oman to the Persian Gulf, the principal loading point for oil shipped from Saudi Arabia, the world’s largest oil exporter. The channel is so narrow that blockage would be easy.
A Saudi official told The Associated Press that the other oil-producing gulf nations are prepared to fill any shortfall in Iranian oil supply. But just as unrest in Libya shook the oil market in 2011, concern over Iran could influence prices in 2012 and rocket prices above $200/bl.
“The possibility that there might be a disruption in oil supply at some time in 2012 as Iran retaliates has, I think, permanently embedded a $10 to $20 premium in the price of oil,” said Bernard Baumohl, chief global economist at the Economic Outlook Group. “The danger is if oil starts to move toward $130 a barrel, or even higher, depending on whether that confrontation will escalate. Then you’re really talking about the prospect of the U.S. tipping over into recession or depression in addition to Europe, and that the whole global economy will be facing an economic downturn.”
“It would be nice if prices did come down quite substantially,” said Francisco Blanch, head of commodity strategy at Bank of America Merrill Lynch, who added that the chances were slim. “The idea that oil is going to stay high for a while is pretty well entrenched because this is a premium fuel in the world economy and there isn’t a lot of oil out there.”
Economists say they expect prices to remain high despite the relative weaknesses of the American and European economies because global demand for oil — especially diesel — is escalating and outstripping supply.
There’s a consensus view that high prices will persist through 2012 and beyond. At the same time, there is uncertainty in the forecasts, with some analysts predicting that prices could end up much lower as production increases in Libya and North America and could even drop sharply if the European economy falls apart. The United States Energy Information Administration, for instance, estimated this month that the price of the benchmark West Texas Intermediate, often called W.T.I., could fall as low as $49 a barrel or rise as high as $192 by the end of next year. In other words, it’s anybody’s guess on oil prices.
Sustained triple-digit oil prices could threaten the United States recovery, costing jobs, raising the prices of food and other consumer goods and pushing a gallon of gasoline to $5 or more.
Gasoline prices have remained volatile, rising sharply toward the end of 2010 and the early part of this year before beginning to decline.
New figures from the Federal Highway Administration show that Americans cut back on their driving again in October, which was the eighth consecutive month there has been a decline. A broader measure — the 12-month total of miles driven — shows that motorists fell back to the low reached at the end of the recession in 2009.
“It’s not just, I don’t have enough money, I don’t want to go out and buy gas,” said John Gamel, a macroeconomic analyst at MasterCard Advisors SpendingPulse. “It’s, I have found ways not to have to buy gas and so I’m going to keep doing that.”
He added that Americans had been doing less discretionary driving because they still perceived gas prices as being high. “Consumers have this belief that prices will either go up or they will remain at elevated levels.”
Any volatility in the Middle East, in terms of closing the Strait of Hormuz, could send crude oil; and other refined products such as gasoline, diesel and heating oil, to exceptionally high levels and plunge the U.S. and the world into Great Depression II.
The Master of Disaster