Libyan situation pushes U.S. towards $4 gas

Lions come and Lions go. Some of the lions in the North Africa have left like a lamb, but some want to try to have one last roar.

While the noose tightens around the neck of Moammar Gaddafi as he loses his grip on realty, the market still fears the outbreak of civil war. The United States is trying to strangle the murderous regime and froze $30 billion of its assets and rebels have taken control of the countries lifeblood by controlling the countries oil fields. Yet whether he stays or whether he goes, we still will have to deal with the aftermath of the treachery left in his wake. Reports say that 50% of Libyan oil production has been halted and that is 50% of the world’s best quality crude. While the Saudis have already increased production of their sour blends, that's not exactly what European refiners are craving. Dow Jones reports that Saudi Arabia is producing at 9 million barrels a day, up around 500,000 barrels a day from before protests began in Libya. Kuwait has also indicated it could employ its roughly 200,000 barrels a day of spare production capacity if more of Libya's output is shut down. Over half of Libya's 1.6 million barrels a day is down, the country's top oil official said Monday.

Sometimes price spikes hurt more than others. When oil prices rise due to an expanding economy, it's normally considered a good thing. The rising prices moderate demand and allow the supply side to get caught up with demand. Other times an oil price spike comes like a storm in the night, unexpectedly and leaving demand destruction and devastation in its wake. Sadly, this is one of those times. The Department of Energy reported the immediate impact of the recent turmoil in the heart and soul of the global oil market showing a sharp rise in both diesel and gas prices. The EIA report that gas prices soared a whopping 19.4¢ in the recent week hitting a national average of $3.833 putting a cap on what was the most expensive gas price in February ever! Truckers will get hit hard as diesel prices soared 14.3¢ per gallon hitting a sticker shocking $3.71.6. In more and more cities across the nation we will see $4.00 a gallon gas become a reality and if prices keep going up it is going to hurt. Not only is the price increase hurting us for obvious reasons, the other factor to consider is we have an economy that is already being artificially pumped up because of QE 2 and other artificial stimuli. This stimulus is like a powerful drug that has already had the side effect of increasing commodity prices and oil especially. Now with the additional impact of real supply tightness, the improving economy can go overboard. The increase in price could stall the recovery and make it more difficult for policy makers to respond to the crisis. More stimuli could lead to more commodity price inflation which in turn could stall the recovery. It could also lead to more splits in global economic unity.

Reuter’s news reported, “The Federal Reserve and European Central Bank may go their separate ways if Middle-East unrest provokes a sustained, inflationary oil price spike. Crude prices creeping back into the triple digits have sparked concern about slower economic growth and will no doubt reignite two long-running monetary policy debates: Should central banks have a single inflation-fighting mandate, as the ECB does, or dual goals of price stability and full employment, like the Fed? Should policymakers focus on headline inflation rates or strip out volatile food and energy prices?”

China was just starting to realize how their currency manipulation was hurting themselves and are now faced with the prospect of rising oil prices, a threat that could force them to make more bad economic decisions. Bloomberg News reported that, “China’s manufacturing expanded at the slowest pace in six months as higher interest rates and lending curbs aimed at containing inflation damped demand. The Purchasing Managers’ Index fell to 52.2 from 52.9 in January, the China Federation of Logistics and Purchasing said on its website today, the third monthly decline. The gauge of input prices climbed to 70.1, the highest level since November.” Oh what a tangled web.

Which of course make the timing of the approval of the first deep water drilling rigs timing a bit suspect? Fancy that. The Obama administration suddenly approves the first deepwater drilling permit in the Gulf of Mexico since the Deep Water Horizon disaster just as gas prices start hitting $4 a gallon. The prize goes to Nobel energy. The administration was under increasing pressure as their policies have cost us jobs and now has put the economy at great risk by not allowing production in even safe wells thereby adding the price spike and the strife that is being felt by the consumers. I guess late is better than never. It is amazing how $4.00 per gallon gas can get Washington moving.

While the market tries to put the global turmoil in perspective the situation continues to be unstable! From Oman to the biggest non-OPEC oil producer in the Middle East, to Kuwait other major producers in the region.

Phil Flynn is senior energy analyst for PFGBest Research and a Fox Business Network contributor. He can be reached at (800) 935-6487 or at pflynn@pfgbest.com.

About the Author
Phil Flynn

Senior energy analyst at The PRICE Futures Group and a Fox Business Network contributor. He is one of the world's leading market analysts, providing individual investors, professional traders, and institutions with up-to-the-minute investment and risk management insight into global petroleum, gasoline, and energy markets. His precise and timely forecasts have come to be in great demand by industry and media worldwide and his impressive career goes back almost three decades, gaining attention with his market calls and energetic personality as writer of The Energy Report. You can contact Phil by phone at (888) 264-5665 or by email at pflynn@pricegroup.com. Learn even more on our website at www.pricegroup.com.

 

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