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DAVID KRUSE

By Staff | Apr 27, 2012

Why with U.S. dependence on foreign oil declining, domestic oil production increasing, fuel efficiencies significantly improving, the U.S. becoming a net exporter of refined fuels and a mild winter that used less fuel oil, were oil and gasoline prices spiking to such highs?

The primary reason is that the higher economic growth rates of emerging and developing economies will result in a crossover with growth of developed economies very soon in terms of their respective share of the overall global economy.

The new guys will soon represent a larger share of the global gross domestic product than U.S. and other old guys who have been around awhile as oil consumers. World demand for oil is surging because the demand for oil tracks growth of emerging economies.

The price of oil in real terms has jumped from approximately $2 per gallon during the 1973 Arab oil embargo to what it is now. Given sanctions on Iran, the market has had to accommodate disruption.

Going to war with Iran while vowing to get the price of gas below $2.50/gallon is less likely than establishing a permanent U.S. colony on the moon.

As a general statement, the reason that it now takes $100 to fill my Dodge pickup is because thousands of Chinese and Indians traded up from bicycles to motor bikes. Consider:

i China: Oil demand up 52 percent since 2002 to 9.5 million barrels per day.

i India: Oil demand up 71 percent since 2002 to 3.2 million barrels per day.

China’s crude imports are accelerating, up 11 percent from year ago quarterly comparison, which had risen 6 percent in 2011. $125 per barrel Brent crude was not stopping China from building its oil reserves, likely because it was buying from Iran at a discount.

The toughest sanctions ever imposed on a nation is reducing access for Iranian oil to the market. Had the Saudis not pumped more oil, we would be calling this a “crisis.”

New fuel economy standards imposed on auto makers by the government are working.

The Associated Press noted, “The U.S. fleet is now more fuel efficient than ever, and gasoline demand in the U.S. has fallen for 52 straight weeks. The U.S. is never again expected to consume as much gasoline as it did in 2006.” Detroit is pouring out a record number of fuel efficient vehicles and consumers are buying them. It is having an impact.

The world is not running out of oil, but the new oil reserves being discovered are more expensive to recover and refine.

The industry started drilling for oil below salt flats a mile down in the ocean off of Brazil. It requires heating tar sands to release the oil in them so it will flow.

The industry has to frac the Bakken oil field in Nrth Dakota to extract it. Oil found in non-traditional areas such as the Arctic does not have the infrastructure in place to bring it home. Technology only helps so much as Alaskan oil production is down 8 percent and production in the North Sea is off 18 percent and declining.

The cost of oil used to be a few dollars a barrel plus shipping from Texas or Saudi Arabia from oil that blew up from the ground under its own pressure.

Today Bakkan oil costs $50/barrel, tar sands oil, $50 to $75/barrel and deep water oil, $45 to $65/barrel.

The cost of ethanol is determined by the price of corn. Ethanol producers are breaking even without the subsidy on $2.30 ethanol, while wholesale gasoline sells for $3.30/gallon or $100/barrel oil.

Brent oil is trading at a $20/barrel premium to U.S. domestic crude. That is where U.S. supply and demand advantages have shown up. Using less ethanol would mean we would have to buy more of the more expensive Brent crude.

The fact that gas prices at the pump are doing what they are when ethanol has boosted domestic supply by 10 percent underscores the upward price pressure on gas prices. Without ethanol, consumers would be paying $5-plus per gallon. Each barrel of domestic ethanol displaces 1.2 barrels of imported petroleum.

A recent Iowa State University study reported that “Thanks to ethanol U.S. consumers saved 89 cents per gallon in 2010. Consumers in the Midwest benefited more, saving $1.39 per gallon. More than 95 percent of all fuel sold in the United States is blended with 10 percent ethanol. Domestic ethanol now reduces oil imports by 128,000 barrels each day. Ethanol contains 230 percent more energy than it takes to produce it.”

The fact the U.S. is consuming less fuel per mile with aggregate consumption declining is glaring evidence that oil demand from emerging developing economies has taken over as the driving force for global oil demand and the oil market.

That means that the U.S. military is protecting sea lanes, oil infrastructure and transportation routes – providing global oil security giving emerging developing economies a free ride.

The U.S. Navy recently deployed a second carrier battle group to the Gulf. Maybe China should finish building its new carrier and deploy it off the coast of Iran with ours.

The structure of global oil demand should impact who bears the cost of its defense. Talking about ethanol subsidies, now surrendered, is a sad joke compared to what we spend to subsidize the oil industry and subsidize other countries as U.S. tax payers fund our military to protect their oil. It’s their demand that is driving oil prices higher. Not one oil senator has brought this up.

David Kruse is president of CommStock Investments Inc., author and producer of The CommStock Report, an ag commentary and market analysis available daily by radio and by subscription on DTN/FarmDayta and the Internet.

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