With such a cold winter, you might think that oil supplies would be dipping, but that is not the case. As a matter of fact, supplies at Cushing, Oklahoma, the official delivery point for NYMEX futures contracts, recently hit an all-time high.
How is that possible? Two things: the Canadians are ramping up their tar-sands production (see the chart here), and “fracking” is starting to do for oil what it did for natural gas. Here is a quote from this Fox News story:
“In the Bakken formation, production is rising so fast there is no space in pipelines to bring the oil to market. Instead, it is being transported to refineries by rail and truck. Drilling companies have had to erect camps to house workers.”
Can you imagine that? Production is on such a rampage that it is overwhelming our infrastructure. We need to build more pipelines to handle it all.
At first, the experts didn’t think that fracking would work on the larger, stickier oil molecule. But they were wrong. Here’s Aubrey McClendon, CEO of Chesapeake Energy:
“We’ve completely transformed the natural gas industry, and I wouldn’t be surprised if we transform the oil business in the next few years too.”
A Credit Suisse analyst thinks that the USA might be able to cut imports by 60 percent in the next nine years.
Is that why President Obama thinks that he has the luxury of encouraging revolution in the Middle East?
And why is gasoline still so expensive?
Oil is the only commodity that comes in scores of different grades, and refineries are finicky about what they will allow into their enormously complex systems. Will we need to build more refineries capable of handling the Canadian sludge as opposed to our traditional “light, sweet” crude? I won’t pretend to be able to predict the price of gasoline. We might have to go through several years of an extensive infrastructure overhaul, but it should lower prices eventually, no?
With all the talk of Ben Bernanke inflating commodities, it’s good to consider the supply effects on prices also. And oil futures (symbol: CL) are down a couple of bucks so far this year, having yawned at the turmoil (ha, ha) in the Middle East. If oil goes into a UNG-like downtrend after things calm down, that could be an un-expected boost to corporate profit margins.