Watching from the sidelines

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It’s very frustrating and it’s why I personally don’t try to forecast diesel fuel price; you simply cannot build a model to handle situations like this.” –Bob Costello, chief economist with the American Trucking Associations (ATA), referring to how the ongoing unrest in Libya is pushing oil prices higher

You really can’t ask for a better summation than Bob Costello’s for the high fuel price scenario trucking is now facing as unrest continues to stay at a fever pitch in Libya.

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Costello, chief economist for the American Trucking Associations (ATA), told me it’s really very simple: as oil prices go, so go diesel fuel prices, for 60% of the price of diesel fuel is based entirely on the price of oil.

And – no surprise here – oil prices are up sharply following what is now eight days of massive civil protests against that country’s dictator of over 40 years, Col. Moammar Gadhafi.

Brent oil futures increased $1.53 to $107.27 per barrel today, following a 6% spike on Monday that lifted that benchmark to a peak of $108.7 – it’s highest price since September 2008. Oil is up some $8 since Friday, Denton Cinquegrana, editor-west coast spots for the Oil Price Information Service (OPIS) told me last night, and there is no doubt that spike is going to be felt at the diesel pump all too soon.

“There is a lot of catching up to be done at the wholesale and retail level over the coming days,” Cinquegrana warned me.

Yet this is the way it goes in today’s oil market – in fact, this is the way it’s behaved for at least the past decade, ATA’s Costello explained to me.

“This has been happening for a long time,” he said. “International events create short-term concerns about the supply of oil, so traders start to build in price to cover those risks. The only thing to do now is to be patient, to wait until things settle down, to see if there will be a price correction.”

One of the biggest underlying worries about the unrest building up in North African and the Middle Eastern nations is how it will impact oil supply and production. Tunisia and Egypt, where civil unrest ousted long-entrenched rulers, were not oil producing nations.

Libya is different, however, as it’s the world’s 12th largest oil producer, with its supplies mainly feeding Europe. Take Libya out of the equation – and its oil production and refining industries are now largely shut down – and European oil traders most look elsewhere for supplies, thus triggering price increases.

Still, it’s important to remember that Libya is small potatoes in the oil production world, stressed ATA’s Costello.

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“It’s not the end of the world if Libya stops producing oil – I would say there’s enough capacity among the other OPEC [Organization of Petroleum Exporting Countries] nations to handle it,” he said. “The worry right now is what happens next. Where does this unrest spread next? Will it affect one of the larger oil supplying nations in that part of the world? That’s what concerns everyone right now.”

Take Saudi Arabia, for example: long under the thumb of the House of Saud, it contains approximately 260 billion barrels of proven oil reserves (plus 2.5 billion barrels in the Saudi-Kuwaiti shared "Neutral" Zone), amounting to around one-fifth of proven, conventional world oil reserve, according to the U.S. Energy Information Agency (EIA).

And although Saudi Arabia has around 100 major oil and gas fields (and more than 1,500 wells), over half of its oil reserves are contained in only eight fields, including the giant 1,260-square mile Ghawar field – the world's largest oil field, with estimated remaining reserves of 70 billion barrels.

To give you some perspective, the Ghawar field alone has more proven oil reserves than all but six other countries. So, should similar civil revolt engulf Saudi Arabia, we could see some REAL price spikes that would make what we’re seeing now pale by comparison

Yet again, though, this doesn’t tell the whole story – or what I think is the weirdest part of all of this, at least.

You see, according to the EIA’s data, the lion’s share of the 18.8 million barrels per day (b/d) of oil the U.S. imported in 2009 didn’t come from – and today STILL doesn’t come from – the Middle East, or even North Africa.

About 51% of crude oil and petroleum products imported to the U.S. come from the “Western Hemisphere,” that is, from North America, South America, and Central America, plus the Caribbean (which includes U.S. territories). Only some 17% of those imports of crude oil and petroleum products come from Persian Gulf countries like Bahrain, Iraq, Kuwait, Qatar, Saudi Arabia, and United Arab Emirates.

In fact, our largest sources of net crude oil and petroleum product imports were Canada and Venezuela. Here’s the EIA’s breakdown of the U.S. largest soil suppliers by nation:

Canada (23.3%)

Venezuela (10.7%)

Saudi Arabia (10.4%)

Mexico (9.2%)

Nigeria (8.3%)

Here’s another factoid: the U.S. is the world’s third LARGEST producer of crude oil at 5.4 million b/d. But crude oil alone does not constitute all U.S. petroleum supplies, noted the EIA. Significant gains occur, because crude oil expands in the refining process, liquid fuel is captured in the processing of natural gas, and we have other sources of liquid fuel, including biofuels – and these additional supplies totaled 3.9 million b/d in 2009, the agency said.

So, in some ways, we should be LESS beholden to global oil markets and thus feel free to welcome (if not encourage) civil protests that topple dictatorial powers in other parts of the world.

But it doesn’t quite work that way, now does it? Instead, trucking must sit back and endure the fuel price shocks to come. “It definitely stinks for our industry to sit on the sidelines like this, awaiting the outcome of events,” noted ATA’s Costello.

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Trucks at Work: Sean Kilcarr comments on trends affecting the many different strata of the trucking industry.

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