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Europe’s New Economic Crunch (Oil Prices Sure Aren’t Helping)

by | published September 16th, 2011

As we sit down here in Krakow to begin government sessions on shale gas policy, and European Union ministers meet in the southwestern city of Wrocław, Poland, thoughts are turning once again to oil pricing…

In case you haven't been watching, Brent prices in London trade are accelerating, approaching $113 per barrel, while the West Texas Intermediate (WTI) benchmark traded in New York is about to break the $90 per level again.

The spread between the two remains at all-time highs, indicating that Brent will continue to appreciate quicker than U.S. pricing, although both are rising.

That spread is “in favor” of Brent.

This creates a continuing problem for the E.U., which is faced with mounting eurozone currency and liquidity problems, weakness in its banking sector, and a European Central Bank that's experiencing dissent – within its own ranks – over the proper course of action.

Today's meeting in Wrocław concerns whether Greece will receive the next tranche of a bailout package. That package is already widely perceived as being insufficient to prevent some sort of Greek default. Plus, the Germans are taking a hard line on what is necessary for that largess to keep coming.

Meanwhile, the internal dispute is getting intense.

A good example is the decision made this morning by the ministers. Or actually the non-decision. The ministers decided… not to decide until next month.

The prospect of higher prices for Brent further complicates matters with the common currency.

The euro has been losing ground against the dollar throughout the latest period of the debt crisis. Of course, that says less about the dollar's strength that it does about the euro's enduring weakness.

That, combined with a rise in the cost of energy, means Europe is facing the prospect of a new economic crunch.

This one has the potential of completely derailing this continent-wide recovery already distinctive for its anemic performance.

In Krakow, Too, Our Problem Is Oil

There are essentially three reasons Poland has decided to expedite decisions on developing its domestic shale gas.

First, they may well have a lot of it. The estimate I will be giving them puts the extractable reserves in the five basins already identified in the country at more than 187 trillion cubic feet, or five times the rest of Europe combined.

Second, Poland is dependent upon Russian imported gas, introducing the latest stage in a political disagreement 500 years in the making.

But it is the third reason that is most compelling…

Russia sells that gas to Europe according to long-term (20- to 25-year) contracts, and two provisions are causing great concern in places like Poland.

First, the contracts contain a “take or pay” provision. That requires an importing country either to take at least 80% of the contracted gas… or to pay up anyway.

As grating as that is, though, it is less significant than the second aspect of these contracts.

Second, they set the price for gas according to a basket of crude oil and oil product prices. This means, as the price of oil increases, the price of natural gas increases right along with it. With Brent pricing levels moving up, Europe is looking at a more and more expensive attempt to keep warm this winter.

That is, of course, if the latest row between Russia and Ukraine does not turn into a repeat of January 2009. Then, a similar dispute prompted Kiev to cut gas passing through its territory to Europe. You see, 70% of all Russian gas going west crosses Ukraine.

It could get ugly.

While we were sitting down to a late lunch today, a reminder of the massing problem began to circulate: Goldman Sachs just issued a report forecasting the price of oil to generic cialis from india bying exceed $130 a barrel in the next year.

Most of us just smiled.

There wasn't anybody at the table who thought the price would be that low 12 months from now.

Sincerely,

Kent

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  1. jack gordon
    September 16th, 2011 at 13:26 | #1

    so goldman sachs intends to drive a barrel to 130?
    they drove it to 147 last time before the world economy collapsed..
    we shall see.
    > jack

  2. Bernard Durey
    September 16th, 2011 at 15:02 | #2

    Hello,I just read some on the future gasoline prices. I have heard by other sites or saw that some expect it to be $5 per gallon at the pump. The last time it went over $4 her,there were some comments like,they don’t own a vehicle so it doesn’t have any affect on them.That was quickly shut down by rising prices that we all pay at the store for food,merchandize,etc. Many of us don’ own vehicles,myself included. I have managed to rent once and awhile and haven’t even done that this year. Probably won’t happen at all and the years going fast. I suspect it will be well over $130 per barrel next year at some point. Even with the tar snds crude coming down and most likely another second line fro the tarsands of Canada. The second line has had a much harder time getting approval and across the state of Nebraska due to the sand hills and the large aquifer,the High Plains Aquifer or the Ogallala Aquifer,either name works. But getting oil in that body of water,a natural resource used for irrigation,drinking,etc. has caused some major road blocks from environmental groups fighting the Keystone second line. They also have a huge oil issue going on in the State of North Dakota with many wells going up. I see also Hyperion has gotten approval from South Dakota with an eighteen month permit extension for anew green refinery at Elk Point,South Daskota. Expected to get tied up in the courts,as well. When it first come up land acquisition for the new refinery was and still is an issue,water for cooling the plant is a major isssue,etc. I am sure land values increased as South Dakota has some good farming land. Hardly an issue to try to condemn land so one can place a refinery in there which will casue pollution issues,etc. But I guess we will just have to wait and see. I know North Dakota started addressing pipelines crossing their state before the deepsea horizon blew up in the Gulf of Mexico. They had concerns of pipe lines crossing the stte and no benefit for the residents of the state of North Dakota. An example is the refinery in Mandan,North Dakota that sits aalong or near the Missouri River and all that leaves the state to the east. The argument there in that state for many years is they have a refinery right in their back yard or front yard and the Bismarck,Mandan area usually have the highest gas prices in the state.
    So,I guess we will have to wait and see,not only locally or nationally but also on the global basis as other issues develop as you have pointed out. Once again thank you I enjoy reading these articles,although at first I had a rel hard time of getting the full story and/or videos offered on my system. Have a great day and what do you think an all new high in 2012 for imported crude oil. That be around $150 if the old record was $147. But what is that actually if the dollar continues to decline. I know we saw it shoot up a little bit but on one site it had shown the dollar pretty much in decline from 1913 through 2013,which we are not quite there yet but it was equivalent to about 5 cents. What would happen if the value of the dollar hit zero or even a negative value? Once again I apologize for any typographicals and have anice day. I expect I will hear some later in future issues.

  3. Tib Csabai
    September 16th, 2011 at 16:37 | #3

    Firstly, I am totally frightened when political science majors, like Dr Moors, expound on petroleum engineering/geological issues like, Poland having 187 trillion cf of shale gas. We in the profession know that without significant drilling, these estimates are at best only 50% or less accurate. This one appears to be based on insitu shale estimates and are likely less than 20% accurate.

    Secondly, oil is not in short supply, in contrast to the rubbish the national news services state. The problem is that it’s in the wrong places, places our politicians want to denigrate for their lobby’s purposes. For example, Iran, Iraq, Venezuela, Libya, and Sudan could produce an extra 20 million barrels per day.

    Thirdly, the price of oil is dependant on the world demand, and that’s based on the world economy. Surely, the Western world is slowing faster than China and India are growing … giving a net growth of “nil”, ergo the price of oil should remain level for sometime. GA’s prediction then is on the high side and not the low side.

  4. September 16th, 2011 at 20:07 | #4

    i have made a discovery or found out about another persons discovery global warming is caused by increased atmospheric moisture clouds which has been induced by co2 you can reduce atmosphereic moisture by cloudseeding which will reduce global warming irelevant to the levels of co2 the best plce to seed clouds is where it is cold ie poplar caps cloud seed polar caps and create more snow reducing sealevel rising and reduce global warming oil and coal forever think about it frank

  5. Frank Clayburn
    September 17th, 2011 at 17:44 | #5

    I have one comment that I think someone had better start considering in the near future that will impact the world economy and send us into a second recession and maybe more. I am talking about OIL and the impact it will shortly have on the market due to political issue in the Middle East. I am not a politician nor an economist, I am a retired marine that hs spent most of my 20 plus years in the Middle East.

    Here is why I think the economic issue will become very severe over the next few weeks. Lets talk about the Arab Spring the changes in Tunisia, Egypt and other places, the unrest now permeating Syria, originally I was not to worried about it until I realize that Palestine was coming up for a statehood vote in the UN. Automatically we all know that Israel and the US will veto that in the security council. But if the vote goes before the general council membership I think it will pass. The Israelis will not honor it, causing in my opinion the Arab Spring fever to hit the PALESTINIANS who will commit massive riots and unrest. The Israelis being who they are will react. Assad setting in Syria next door being hammered by the Arab Spring will move Hezbollah and Hamas into
    Lebanon to take the heat off the Syrians attentions will be focused elsewhere and other Arab leaders will have no choice but to back the Palestine cry for statehood. What do you think the price of Oil will be by the end of that week? When is this vote to be taken, next week some time. The young people who have initiated this Arab Spring will most likely demand that Israel honors the UN general vote, when it does not I can only imagine the economic impact. We as a nation have been focused on the economy and not the world political issue that could immediately put it into a spin by raising the cost of energy. If you think we have a deficit now, think about the force that we would really have to move to protect OIL , Israel and other American interests. I hope that I am wrong but I don’t think so there are so many leaderless Arab countries now and the majority of their populations are 35 and younger they don’t remember the Arab DEFEATS OF THE 60S 70 AND 80S by Israel they will test them again. The problem is the world can ill afford this at a time when the world economy is precocious close to defaulting in many countries and I ma not just talking Greece. If I were a betting man and I am not, I would bet on OIL stocks very heavily shortly.

  6. Dave Truitt
    September 19th, 2011 at 14:54 | #6

    Well done,thank you DRT@Frank Clayburn

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