Bullish news that an explosion is cutting off oil exports from a pipeline in northern Iraq and that the security situation in the Niger Delta is deteriorating has been overshadowed by demand side weakness. Even the continued loss of oil production from Gulf rigs in the wake of Gustav and Ike hasn’t held oil prices above $100, because futures traders think the temporary reductions in supply in September can be made up in October and beyond.

That won’t help the average consumer much over the next couple of weeks though. Gasoline supplies are flirting with Minimum Operating Levels (~20 days of supply, or ~182 million barrels based on last week’s demand). If they get any lower, we may see disruptive shortages of gasoline at more remote markets around the country. Average pump prices may climb back up to the $4 level nationwide before higher imports and restored production gets the system back in order in October (as long as another hurricane doesn’t hit the Gulf and other supply shocks are avoided).

A key to economic recovery is energy efficiency and substituting oil for domestic energy sources such as natural gas and wind. Otherwise, our economy’s attempts to get out of the doldrums will be blocked by the heavy burden of high-priced energy. Oil remains more than 30% higher than its average last year and almost five times the price level of early 2002. Meanwhile, efficiency and renewables have matured to become reliable alternatives as long as we implement progressive policies like an extension of the federal renewables Production Tax Credit.

Onwards to a sustainable energy transition-