rrman...it's pretty simple:
1) 1998..Economy in U.S. was pretty strong, but in Asia it slowed to a standstill, courtesy of the currency crisis. Overall oil demand dropped, followed shortly by crude prices.
2) Government regulations since the beginning of the Clinton administration, have become increasingly onerous as far as drillers, refiners, and pipeline operators are concerned, especially EPA regs. Result: all these businesses have increased operating costs. Response: delay capital spending, postpone construction of new facillities (made all the easier by declining corporate earnings)..
3) Economy hums along in U.S., aided and abetted by the 3 Bubbles of the apocalypse: equity, credit and real estate. Record numbers of SUV's sold and on the roads, larger houses constructed, increased sales of electrical devices of all kinds (hey, the 'Net did bring about a new Era...in power consumption! At the same time, Asia recovers somewhat, and Europes economy grows rapidly as well.
4) In the Oil Patch, as oil hits $10/bbl, NO ONE starts any new exploration projects. Hundreds of thousands of experienced oilfield, pipeline and refinery workers are laid off, and get retrained in some cleaner, safer (ie, white collar) job.
5) In response to environmental concerns and the not-so-gentle prodding of the Clintonistas, power plants are constructed to be fueled by natural gas, discouraging the use of coal ("the OTHER energy source").
5) OPEC, after YEARS of discord, finally gets act together, cuts production and it sticks.
6) Oil, gas and electrical power prices begin their slow inexorable ascent beginning in the last half on '99. The economy is fine, there is no bubble...or so the media tell us. They also tell us "there is no inflation...ex-Energy, whcih after all is mystical and uncontrollable and doesn't matter in the New Era anyway".
7) In December, Easy Al G. accelerates the printathon. Since the money flows into the credit, equity and real estate bubbles respectively, thereby masking its true inflationary impact, except in commodities (which are superfluous in the New Era, allegedly). Consequently, commodity prices rise, as evidenced by new highs in the CRB index (but it is ignored almost universally by mainstream media and economists alike as a bizarre aberration:
futures.tradingcharts.com
8) In March and April, the stock market seizes up a bit. The Fed is presumably "tightening", when in reality they are printing faster than ever while raising the rates they charge for the cash a bit. Greenspan responds with bland platitudes about "moral hazard", and massive infusions of liquidity via the overnight and 28 day repos, and his syringe of choice, the coupon pass. More importantly, money velocity has found an easier route of recycling, the UNPRECEDENTED loan machines that are modern GSE's (Freddie Mac, Fannie Mae, Fed Home Loan Board, et.al.)
9) Markets "recover" as a result, and the economy (and particularly energy demand) roars ahead.
10) Power shortages crop up throughout the country, especially in the West due to delayed or postponed power plant construction (a byproduct of the "NIMBY" syndrome). Natural gas builds are reduced to critically low levels. Heating oil inventories which were depleted in last winter's shortage, are not rebuilt during the shift to produce gasoline over the spring and summer. Several key refineries are slowed due to infrastructural problems from years of neglect and delayed capital expenditure (and maybe a touch of the Y2K computer bug, for good measure). A large pipeline explosion in New Mexico knocks out a source of natural gas for a prolonged period. Tanker fleets (which were also depleted in the 1998-99 oil crash, with many ships mothballed and merchant crews left to find other work) are increasingly in demand, and tanker rates skyrocket. Inventories of crude, distillates, and gasoline reach the lowest levels at this point of the year (when traditionally there are large "builds" in inventory prior to the high winter/heating energy consumption seasons). Refineries run at 95%+ as evidenced by API inventory surveys (virtually flat-out, as a small percentage are always off line for maintenence). Even though they are running at capacity they can't keep up with the blistering demand.
11)Prices throughout the energy complex explode when it becomes apparent that this energy crisis "really IS different this time". It is a crisis of demand exceeding WORLDWIDE supply, for the first time in modern world history.
Thus, the Supply curve, (now rendered inelastic by inaction and regulation) and Demand curve (elevated by booming markets and unrestrained economic growth) are set on an inexorable collision course. Hype? I don't think so, sir!!! |
