Summary
Energy costs are at the heart of all economies and impact growth and most certainly recoveries from downturns. Transport fuel costs are second only to power generation in terms of importance to economic growth.
Analysis
The request is to write an analysis of what should we be looking for regarding fuel costs and our economic recovery.
The simplistic answer of course is " the lowest price possible".
To try and place some numbers towards answering this question, gas prices in the US under $2.60 and diesel prices under $2.30.
Prices much above those levels will have a dampening effect on recovery and getting back to the levels we saw when crude was above $110 will choke off much of any recovery that will have been able to get started prior to getting back to that price level again.
Sadly, it would not take much to get back to those levels or beyond. Many predictions have crude back above $80 by year end and some equations have it well above $100.
Many producers are now saying that they see prices getting back close to that $100 level and some of the more beligerent are saying that they will hold back production if crude isn´t soon above $85.
The real issues are much more broad than that and actually work counter to the simple answer of lowest price possible and really do favor the upper price predictions of most involved than the lower price predictions of those with hope as their only argument.
Here are some of the more central issues and concerns that are in place and fundamental to the crude and transport fuel equation and as we look for some signs of recovery, have the potential to slow or snuff any meaningful recovery.
At the moment, even with the significant run up in crude prices, transport fuel costs are at manageable levels for most of the country but, this is a false and dangerous position that will not remain as the status quo for much longer.
As the article correctly points out, a great number of transport companies have already gone out of business. Those that are left have found customers that are willing to accept fuel cost pass throughs but, at some point in the crude pricing equation, pass throughs will not be easy to continue. At least as it would apply to recovery.
While the economic collapse that began last year has had a substantial impact on demand, most especially in the US and Europe and has been a contributor to the decline in fuel costs in both those economies, other economies are not experiencing those same types of declines and some are indeed already in recovery to some level.
Most obvious are China and India, however, other economies are also on the rise in terms of transport fuel demand growth and energy demand.
China is on a global commodity buying spree, especially of key and storable commodities and that in and of itself has had some upward pressure on crude prices along with other commodities.
But, of more importance and concern, especially looking at reasonable economic recovery are the following fundamentals that will (not might, will) have impact:
Production declines at many of the major fields. This is not being felt momentarily but, with the crude market being what it is and the number of speculative interests getting back into the game that added a major "premium" onto crude prices in 2007 and a good part of 2008, any hint of demand increase and we will see a push on prices that will have impact on any recovery.
Cutbacks on exploration and development of new fields. Always an issue when discussing crude and energy prices but at this particular juncture even more of an issue due to the above. Also, new discoveries are at significant deeper levels and less than easy locations adding to the costs to exploit and more importantly to offsetting any supply issues that can impact the markets and prices.
No real follow through on any meaningful energy policy for alternatives. The US particularly has fallen back into complacency on most of what was driving this particular bus and for all the rhetoric on becoming energy independent and developing domestic alternatives to break the dependency on imports, not much has been done to make any kind of meaningful progress towards that lofty goal.
Cap and Trade legislation likely in the US. This is nothing more than another tax on energy and all will feel it and could dampen recovery as it´s ill-considered effects begin to be felt, especially in the pricing of energy to users.
New taxes throughout the US commercial sectors, especially with a lot of government crosshairs focused in on energy groups as government seeks to raise revenues to help support the deficeits brought on by rescue efforts in the financial sector to date, bailouts, stimulus, healthcare reform and a host of other spending programs.
A weakening dollar brought on by spiking inflation will push crude prices higher and rekindle the discussion about pegging crude to the dollar. We have seen evidences of countries like China and Brazil entering into supply contracts absent dollar related pricing. To date these have been in non-crude related contracts but, it is clear that this is a trend that has legs and not likely to go away. This change in pricing dynamics, especially as it would apply to the US in and of itself could quickly trim any recovery and as this appears to be something that will continue (clear to me at least) and push prices in the US.
These are some of the clouds on the horizon of any economic recovery and are not being adequately addressed or planned for at the moment.
The US has a bad history when it comes to energy, it has always manged to work it´s way out in the past but, for a number of reasons I think the averages are now running against the market "bailing us out" this time around.
Planning and mangement in this sector of the US economy has been sadly lacking for the past 30 years and given the current state of things in the economy and the world, are even more necessary now if any hope for recovery of a meaningful nature is desired.
At the moment, that is not evident and the recovery is at risk of being diminished or extinguished at the first signs of showing itself.
