Oil rose yesterday on reports of a fire at a Turkish pipeline

Oil spiked up about $2.00 yesterday on reports that a there was fire at a Turkish oil pipeline. However, today the fire is out and crude futures are down below $118. Next stop, $100.

Crude is trying to build a base at $118

If the bulls are successful, we'll skid for a while at these levels. If not, watch out $100.

The laws of supply and demand are axiomatic

Irwin Kellner’s piece at Marketwatch yesterday underscores the “bubblicious-ness” (to paraphrase Fox’s Cody Willard) of the crude futures market. Power grafs:

What is even more interesting is the reason for this plunge. It is not so much due to increased supplies of crude as to decreased demand for the black stuff. This is indicative of a major change in lifestyles, personal and corporate.

Supplies of oil ebb and flow depending on the weather, strikes, terrorism and the like, so it's hard to tell if there has been any significant change. Demand is easier to track, and here the results are startling.

Take gasoline, the biggest use of oil in the U.S.. Instead of rising 1 or 2% a year as it usually does, gasoline use has been falling, year-over-year, for most of this year.

No mystery why: Americans have been reducing their driving for some time, with the year-to-year percentage decline in miles driven growing month by month.

In March, the yearly decline was a bit over 3%. That was the biggest drop in miles driven since 1942. May's drop of nearly 4% over last year was the most ever, according to the Transportation Department

What happened in 1942? Gasoline was rationed because of the wars in Europe and the Pacific. If this trend holds for any length of time, I say oil futures fall below $80.

The Middle East is a two tined fork, with the pointy bits being terrorism and petroleum extortion. By overthrowing the Taliban and Saddam Hussein then routing al Qaeda in Iraq, we’ve more or less handled the first pointy bit. Now we have to address petroleum usage and our addiction to oil from that region. Drilling here is a good start and I think we’ll see that start in earnest sooner rather than later. When combined with solar and nuclear, we should be in good shape. But we can not do one without the other. We must do both and quickly.

I guess we didn’t build the base yesterday

Oil futures closed below $122.50 yesterday for the first time in a long time. Oil prices are down overseas as of this writing (7:15 am EDT) and show no sign of stopping. The ruckus that Sen. John McCain (D-AZ) is raising about drilling offshore coupled with the feckless response from Sen. Barack Obama (D-IL) have combined to put pressure on crude futures. Combine that with contracting demand and we have a recipe for the price of oil cratering below $100 within the month. And it won’t come back.

Four buck gas has had the same psychological impact that the attack on the World Trade Center did in 2001 – it woke America up. The 9/11 attacks woke up Americans to dangers of terrorism and the policies of appeasement. Just a few months prior, terrorists attacked and nearly sank the USS Cole, a sovereign ship of the US Navy in a foreign port. In the earlier part of the century, that launched a war (“Remember the Maine”). The attack on the USS Cole was greeted with a shrug by most folks here. Times were good and nobody was concerned with what “those crazy Arabs” did “over there”. The September 11^th attacks woke up everyone to the real threat of what not addressing problems can morph into.

The same is true of environmentalism religiosity. The neo-pagan attitudes of wacko environmentalists have locked up domestic oil productions for decades. There really is no other explanation for their vehement opposition to oil exploration on the outer continental shelf and ANWR. ANWR is the size of South Carolina and to bring the oil out, we’d need to drill in a area the size of RDU international airport. The idea that we should keep the place as pristine as say, The Grand Canyon, beggars believe. The Grand Canyon is designed for tourists. Indeed, millions of people visit every year. The same can not be said for ANWR, which is on the remote edge of northern Alaska.

But that brings up a point I made earlier – four buck gas was traumatizing. People who drive large SUVs are the objects of pity, not scorn. The folly of driving three ton trucks as daily drivers is quickly underscored when a fill up costs nearly $100.

The American automotive industry noticed somewhat belatedly and is shuttering SUV production. Ford is actually building their European line here in what are soon to be former SUV factories. This is good, as a Ford Fiesta – roughly the same size as a Ford Focus here in the States – can get 60+ mpg when equipped with diesel and driven at highway speeds. A Saab 9-3 with a diesel also gets more than 60 mpg on the highway. Why these cars weren’t built / weren’t imported to The States is anybody’s guess. My would be that there was no demand.

Well there is now. And since SUV production has been curtailed, we won’t be seeing many more coming off the line. People will remember this price shock for years and years to come.

The age of the SUV is dead. Long live the SUV.

We appear to be skidding sideways

Prices for crude appears to be skidding sideways, trapped in a narrow trading range. Whether this is the $122.50 base awaits to be seen. Still, there does appear to be support here. Maybe it will hold or maybe it won't.