Weekly Reports | Feb 27 2012
By Andrew Nelson
US economic data continue to improve, and last week’s four year low in job claims data puts a thick, dark underline under the assertion. However, at the same time corporate America is starting to hire on new hands, putting money back in the pockets of consumers, an accelerating rise in crude prices is threatening to skim some of the cream off the top of a brightening US outlook.
Analysts at Canada’s CIBC World Markets point to the fact that Brent Crude prices, which underpin the prices Americans (and Canadians) pay at the pumps, are back in the US$130 neighborhood. This is the same place they were 10-11 months back when many a pundit was predicting skyrocketing crude prices were going to plunge the world back into recession.
While the team at CIBC doesn’t think there’s nearly the danger there was last year, noting the US consumer is in a far better position, they still note a protracted stay at current or higher price levels could easily take some of the shine off of what was until this week shaping up to be a positive scenario.
On CIBC’s numbers, a 25% rise in oil prices, which is just a tad more than we’ve seen so far, could trim nearly half a point from US GDP over the following four-to-six-quarter period.
Continued higher prices wouldn’t be a huge boon for Canadian’s either, as is often thought. The team points out that after a modest lift in near term GDP, growth effects would quickly turn negative for periods beyond half a year after the drag applied to exports from both a higher C$ and a softer US economy are taken into account.
Citi economist Steven Wieting from New York is in a similar frame of mind, but he’s more specifically interested in US petrol prices. He notes that the near 14% rally in wholesale gasoline quotes thus far in 2012 is implying an additional US$40bn annual increase in costs for US drivers this year. And that’s not US$40bn more than last year, but US$40bn more than what was being factored in at the beginning of this year.
While he notes most other US consumer energy costs have been fairly unthreatening, gasoline is far more important, as it drives most of the variation in total energy costs in the US. This time around, it’s not supply issues that are driving up prices, but rather US refining issues on the back of risk concerns about Iran and the broader Middle East in general.
With US production continuing to rise, Wieting sees the persistence of the US economic recovery and its impact on the broader global recovery is likely a major contributor to the current high levels of crude prices. A big lift in US domestic production is also a factor, he notes, pointing out that as recently as last year the country imported 60% of the crude oil and other petroleum products. However, there has been a vast amount of new investment in the sector, which is also forcing prices higher.
However, when looking at the US$40bn extra US consumers are now likely paying for gasoline compared to estimates from the start of the year, Wieting notes that it’s only an extra US$25bn above 2011 levels in absolute terms, or 0.2% of disposable income. Thus, while rising oil erases some of the windfall from a drop in consumer prices some were hoping for, he points out that the modeled increase in fuel costs in 2011 was still much larger. Consumer gasoline spend has risen by more than US$25b in eight of the past 10 years. Thus, he predicts overall US growth forecasts are not likely to change sharply because of the early 2012 price rise.
One of the most interesting factors mentioned by Wieting in the above prognosis is the increases in US crude production, which is borne out by data released by a separate global energy team from Citi last week. The team notes that the US has become a net exporter of refined petroleum products for the first time in 60 years. The percentage of oil imports as a percentage of domestic demand has fallen from over 60% in 2005 to 45% in 2011, says Citi.
The increase has the team from Citi claiming the concept of peak oil being touted for the last 10 years or so simply isn’t the case, with vast amount of production being brought on in the US. Shale oil from North Dakota is now leading the US to be the fastest growing oil producer in the world and national production is growing so fast that even declines in Alaska and California and a slow recovery in the gulf isn’t slowing US production down.
The team from Citi expects oil production in the US will continue to surprise to the upside, while it also expects industry expectations will lag the reality. Citi notes the rise in shale oil production is already starting to have a significant impact on global oil markets, with rising production driving a wedge between WTI and Brent prices.
Citi says that without this rise in production, US oil imports would be more than a million barrels per day higher. The team expects the impact will only increase as shale oil production accelerates. On Citi’s numbers, production will rise by 2 million barrels per day or more by 2020. And that’s without counting a resumption of Gulf of Mexico activity, which the team notes would add another 1.7- to 2 million barrels per day to the numbers. If political obstacles to shale oil development in California are overcome, then the team sees yet another 1 million barrels per day added to the tally.
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