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Quarterly Energy Update, First Quarter 2011

April 7, 2011

Middle East Unrest Drives Prices Higher

Turmoil in the Middle East and North Africa (MENA) drove oil prices significantly higher during first quarter 2011 (Chart 1). While the disruption to production has been minimal thus far, the fear of contagion spreading to other countries in the area is high, and oil prices are currently pricing in that risk.

MENA unrest has driven West Texas Intermediate (WTI) prices from around $90 per barrel at the beginning of the year to $105 per barrel currently. Brent prices have risen as well, hovering around $115 per barrel recently. From Jan. 5—the start of turmoil in Tunisia—through March 28, WTI is up 15 percent and Brent is up 20 percent.

The current spread between Brent and WTI, at almost $10 per barrel, is near record levels and is the result of the high level of inventories at Cushing, Okla., the delivery point for WTI (Chart 2). High inventory levels are due to concerns over infrastructure limitations as the oil flowing into Cushing from shale plays in Canada and the Bakken has increased faster than outbound capacity.

Middle East Supply Disruption

Supply disruption thus far is mainly because of fighting and civil unrest in Libya. The U.S. Energy Information Administration estimates that 60 to 90 percent of Libya’s 1.6 million barrels per day of oil production has been taken offline. This shortfall is easily covered by OPEC excess capacity, which primarily resides in Saudi Arabia, but the issue is more complex. Most of Saudi Arabia’s excess capacity is sour crude, whereas Libya’s oil is higher-quality light, sweet crude.

The primary concern surrounding MENA countries is that civil unrest could spread to larger oil-producing nations like Saudi Arabia or the United Arab Emirates. To head off contagion, both countries have announced aggressive support measures such as job guarantees and various subsidies. So far, Saudi Arabia has announced $36 billion worth of additional social programs.

Impact of Higher Oil Prices on the U.S.

The price of WTI averaged almost $94 per barrel in first quarter 2011, up 19 percent year-over-year. However, the average price of imported oil increased 26 percent. During the first quarter, the U.S. imported approximately 8.7 million barrels per day of crude and petroleum products, up 0.6 percent from the same period in 2010. This implies the U.S. spent about $1.2 billion more per week on imported petroleum than in the same period of 2010.

Gas Prices Follow Suit

Gasoline prices have trailed the ascent in oil prices, with the nationwide average rising from $2.82 per gallon at the beginning of the year to $3.55 per gallon recently, a 26 percent increase. So far in 2011, gasoline consumption has trended slightly above 2010 levels, despite higher prices, but may slow if prices continue to rise (Chart 3).

Increasing gasoline prices directly affects consumers. In the first quarter, gasoline consumption increased 0.6 percent over the prior year even as gasoline prices rose 20 percent. This translates to an additional expense of about $50 per household per month, or a total increase in gasoline expenditures of $17 billion in the first quarter. As the recovery has taken hold and gasoline prices have risen, expenditures on gasoline and other energy goods as a share of personal consumption have increased and are currently near 4 percent (Chart 4).

Petroleum Products Demand

U.S. distillate demand rose in March, indicating both a cool end of March and that more goods are being moved about the country as the economy continues to firm. Total oil products and gasoline consumption held relatively stable; however, demand for jet kerosene declined about 2.6 percent, implying a slowdown in air travel (Chart 5). If oil product prices continue to rise, it will likely result in reduced product consumption.

The International Energy Agency (IEA) expects global demand to rise 1.6 percent in 2011 after increasing 3.4 percent in 2010. Growth in world consumption will be driven by developing nations in Asia, the Middle East and Latin America. Overall, developed countries’ consumption is expected to decline very modestly, and the U.S. Energy Information Administration expects U.S. demand to grow only 0.7 percent in 2011.

Japanese Earthquake

The massive earthquake that struck Japan on March 11 has had a significant impact on the country’s power generation sector. According to the IEA, about 60 terawatt-hours of nuclear electricity generation is now offline. To meet this shortfall using solely oil, consumption would increase by slightly over 200,000 barrels per day and account for about 20 percent of oil-fired capacity. In reality, the shortfall will likely be met by a combination of fuel oil, crude oil, liquefied natural gas and coal.

Natural Gas Demand Rises

Natural gas prices moved above $4 per million British thermal units on March 22. Solid economic growth has increased the demand for natural gas, while a decline in gas drilling has lowered supply, putting upward pressure on prices. Inventories are near normal seasonal levels and down from a more elevated position at the start of the year (Chart 6).

—Jackson Thies and Mine Yücel

About the Authors

Thies is a senior research analyst and Yücel is a vice president and senior economist in the Research Department at the Federal Reserve Bank of Dallas.


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