Oil Drops on Profit-Taking, Easing Iran Tensions

Reuters
Monday July 7, 3:23 pm ET

NEW YORK (Reuters) - Oil dropped over $4 a barrel Monday on profit taking and signals that Iran will be more flexible in negotiations over its nuclear program.

Oil received additional pressure from news Hurricane Bertha will likely avoid damaging Gulf of Mexico energy facilities.U.S. crude settled at $141.37 a barrel, down $3.92 and below Friday's low of $143.22. Brent crude settled at $141.87 a barrel, down $2.55. The New York Mercantile Exchange did not issue an official Friday closing price due to the July 4 holiday.

"Crude prices are down on profit-taking as the fears that brought prices up before the July Fourth holiday didn't materialize -- there was no attack on Iran and the storm Bertha does not appear to be a threat to oil production," said Phil Flynn, an analyst with Alaron Trading in Chicago.

Oil hit a record $145.85 on Thursday, but later eased as traders anticipated lessening tensions between Iran and the West after Tehran responded to a package of incentives to try to resolve the dispute.

Tehran's foreign minister Sunday expressed optimism about what he said was a "new environment" for talks.

"Iran shows signs of improved lines of communication," said Barclays Capital in a report.

But Iranian President Mahmoud Ahmadinejad said Monday Iran would not abandon its right to enrich uranium and rejected a major powers' demand to do so as "illegitimate," the official IRNA news agency reported.

Earlier Monday, oil prices were pressured by a gain in the dollar, which reached a one-week high against a basket of major currencies, benefiting from a European Central Bank tone that has reduced expectations of further interest rate rises.

Strength in the U.S. dollar can reduce the appeal of oil and other commodities to investors as a hedge against inflation.

Oil has gained over 40 percent this year, driven partly by tension over Iran's nuclear program and expectations that global supply will fail to keep pace with demand from fast growing Asian economies such as China.

The rally has led to fuel protests worldwide and begun to dampen demand in some consumer nations, including the United States, the world's biggest energy user. World leaders are concerned prices could move even higher.

Leaders of the Group of Eight nations gathering for a summit in Japan fear further rises, Italian Prime Minister Silvio Berlusconi said.

"There are fears oil prices could increase further. Some people fear they could reach $200," Berlusconi told reporters on the sidelines of the summit.

(Reporting by Rebekah Kebede and Gene Ramos in New York, Alex Lawler in London and Fayen Wong in Perth; Editing by Marguerita Choy)

Gasoline Is Cheap: Four dollars a gallon is outrageous! We should be paying much more.

By Robert Bryce
Posted Thursday, May 15, 2008, at 3:24 PM ET

The next time you have to take out a loan just to fill up your tank, remember this: Four-dollar-per-gallon gasoline is cheap.

There's no doubt that high fuel prices are hurting low-income consumers, and high energy costs are placing a tax on the economy that is slowing investment while sending billions of dollars overseas. It's unsurprising that presidential candidates and members of Congress issue new proposals practically every day to lower gas prices: Stop filling the Strategic Petroleum Reserve! Suspend the federal gas tax! Open ANWR to oil drilling!

These proposals are delusions, and Americans are living in a fantasy land when it comes to energy and energy prices. Over the past few years, consumers have been inundated with news stories about the soaring price of gasoline. Invariably, these stories include comments from a motorist who is outraged at the evils of a) Saudi Arabia, b) OPEC, c) Big Oil, d) all of the above.

But by almost any measure, gasoline is still cheap. In fact, it has probably been far too cheap for far too long. The recent price increases are only beginning to reflect its real value.

When measured on an inflation-adjusted basis, the current price of gasoline is only slightly higher than it was in 1922. According to the Energy Information Administration, in 1922, gasoline cost the current-day equivalent of $3.11. Today, according to the EIA, gasoline is selling for about $3.77 per gallon, only about 20 percent more than 86 years ago.

Given the ever-increasing global demand for oil products—during the first quarter of this year, China's oil consumption jumped by 16.5 percent—and the increasing costs associated with finding, producing, and refining crude oil, it makes sense that today's motorists are paying more for their motor fuel than their grandparents and great-grandparents did.

Gasoline is also a fairly minor expense when you consider the overall cost of car ownership. In 1975, gasoline made up 33.4 percent of the total cost of owning and operating a car. By 2006, according to the Bureau of Transportation Statistics, gasoline costs had declined to just 17.1 percent of the total cost of car ownership. Of course, fuel costs have risen by about $1 per gallon since 2006, but even with those increases, fuel continues to be a relatively small part of the cost of car ownership. By contrast, the fixed costs of ownership—insurance, licensing, taxes, and financing—have increased nearly fivefold since 1975. Maintenance costs have also quintupled over the same time period. Given those increases and the relatively low price of fuel, it's not surprising that Americans are opting for big vehicles with powerful engines. Considering the overall cost of owning a vehicle, fuel expenses just aren't a very big deal.

History shows that significant declines in U.S. oil consumption occur only after prolonged periods of high prices. Over the last two decades, U.S. consumers have been spoiled by low fuel prices. And those lower prices led to a buying binge that put millions of giant SUVs, pickups, and other gas guzzlers on our roads. Today's higher prices are forcing consumers to adapt. The EIA now expects U.S. gasoline consumption to decline this year—the first drop in demand in 17 years. In April, sales of small cars in the United States were up by 17 percent over the same period a year earlier while sales of SUVs, trucks, and large cars all fell by about 30 percent.

On the environmental front, people concerned about greenhouse-gas emissions should be cheering today's oil prices. Expensive motor fuel is the only thing that will lead consumers to use less oil and make the switch to hybrid vehicles, smaller cars, and public transit. Higher oil prices are convincing automakers to change their fleets. Earlier this week, Nissan Motor Company announced that it will begin selling an electric car in the United States and Japan by 2010. Carlos Ghosn, the chief executive of Nissan, made it clear that fuel prices were a factor in the company's decision to build electric cars, telling the New York Times that "the shifts coming from the markets are more powerful than what regulators are doing."

American gasoline is also dirt-cheap compared with gas in other countries. British motorists are currently paying about $8.38 per gallon for gasoline. In Norway, a major oil exporter, drivers are paying $8.73. In 2007, out of the 32 industrialized countries surveyed by the International Energy Agency, only one (Mexico) had cheaper gasoline than the United States. Last year, drivers in Turkey were paying three times as much for their gasoline as Americans were. The IEA data also show that in India—where the per capita gross domestic product is about $2,700 (about 6 percent of the per capita GDP in the United States)—drivers have been paying more for their diesel fuel and gasoline than their American counterparts.

(Gasoline is also cheap compared with other essential fuels. A Starbucks venti latte costs the equivalent of $23 per gallon, while Budweiser beer runs $11 per gallon.)

The simple truth is that Americans are going to have to get used to more expensive gasoline. And while they may continue grumbling at the pump, they need to accept the fact that even at $3.50 or $4 per gallon, the fuel they are buying is still a bargain.