Republicans hate to hear facts about the price of gasoline, so I intend to keep forcing them into the public arena. Unfortunately, most Americans know a whole lot less than I know, and yet still think they know it all. It seems to be a growing trend in most things financial and even more so in all things political.
The Good News
American consumers and their wasteful ways are no longer responsible for swings in oil prices. Yes, we still use a disproportionate amount of the world’s energy. We still love our pickups, SUVs and pleasure boats, but damned if we want to pay the price to use them, regardless of whether we pay half of what other countries pay or not.
But when gasoline first reached $4 a gallon back in 2008 our gasoline habits began to finally change in a meaningful way. Average fuel economy has improved by 20% since 2004 in Ford’s fleet. Ford Focus sales, as the 40 mph domestic sales leader, have never been stronger. Similar sales increases are taking place in all brands. Spontaneous trips for chips have been replaced with planning and a dramatic increase in online sales of staple goods. Weekly gasoline demand is “tepid,” says JPMorgan oil analyst Lawrence Eagles, and he expects U.S. demand to fall even more this year by 100,000 barrels a day, even as the economy expands 2.2%.
Common-man theory says that weakening demand should be sending gasoline prices down. Supply-demand stalwarts refuse to acknowledge that the theory no longer applies to gasoline. So why are we “poor poor” Americans not seeing any reward for our “sacrifices”? Why is gasoline once again heading for $4 a gallon, with the possibility of $5?
Gas Prices: Always Politicized But Never Understood
Once and for all, there is no shortage of crude oil! So all the “Drill-Baby-Drillers”, and “Keystone Pipers” can just keep on churning out all the bumper stickers they want, but there just is not a shortage. I sometimes secretly wish that there really would be a horrible, critical shortage because that would finally force us to seriously look at alternatives. But that would cause a great many hardships and I don’t want that just to prove a point. I realize that this disappoints all the FOX Noise trolls in chat rooms like RockinRoosters Political Chat who want to fire off expletives and condemnations of tree-huggers or Pres. O., but they’ll just have to keep trolling and believing in voodoo economics…oh, and the veracity of the likes of Bernie Goldberg or Bill O’Reilly.
One could argue that $100+ per barrel prices are drawing out supply. The problem with that argument is that there was a ton of crude available at $80 a barrel as well, and domestic production especially in North Dakota is booming. If the United States could somehow actually use the oil and products that it produces, we wouldn’t need the condescending Canadians, or the spoiled-rotten middle-east Kings to feed our energy habits. If we adapted to natural gas, we could tell them all to shove it where the sun never shines….or could we?
Since the U.S. government can own no companies, we are dependent upon the private sector to do the right thing. If the government tried, in any way, to take control of the processes, we would hear blood-curdling screams of Socialism, Communism, and a whole lot more “isms”….except of course “intelligent-ism”.
So we sit and wait for ExxonMobil, Royal Dutch Shell, British Petroleum, etc. Since they are already the most profitable companies in the world, save the Healthcare Insurance Companies, where is the incentive to switch? Why do we think the President can do a damn thing about it? “We” [the intelligent ones]Don’t. But the Republicans keep lying that we do, and convincing enough of the mentally challenged in this country that there is something “We” can do, despite all logic and common sense to the contrary. It’s just another political dodgeball they can hurl into the crowd to see how many idiots they can hit.
Canada, of course, has no such restrictions, so we end up buying the same oil from oil sands that “we” have from them, as they sit and watch their idiot southern neighbors rant and rave about healthcare, which they see as a basic human right for their citizens, and sell us our own oil at obscene profits.
Nice system, yes?
There’s no shortage of fear, either. I guess that fear that Israel is going to try to eradicate Iran’s nuclear program, could set events in motion leading to the closure of the Strait of Hormuz. That action would indeed choke off about 20% of the world’s oil supply, it’s true. And it’s also true that fear may have prompted speculators to pump money into the futures market resulting in a $20-to-$30-per-barrel supply-risk premium in the price of crude.
With All Due Respect to Paul Harvey
But now, to the rest of the story. Consumers are not the only dancers in this oil ballet. Refiners, the folks who crack crude to make fuel, play a part as well. They have responded to weak demand in the U.S. by limiting the supply of gasoline.
According to JPMorgan, 19 refineries have shut permanently in the U.S., the Caribbean and Europe since 2009, representing some 1.7 million barrels a day of refining capacity.
Why? This is America for pete’s sake, why else? Profit, duh!!
Refiners lost money last year. Tesoro, a big Western refiner and marketer, dropped $124 million in its fourth quarter.
So, how is it possible for refiners to run in the red when retail prices are gushing?
It’s all about the “6-3-2-1” crack spread. Crude is processed into a whole host of products besides gasoline. The ratio and pricing of one product to the others all figure into a refiner’s profit. The three primary groups are:
- liquid petroleum gas
and Heavy distillates:
- fuel oil
- coal tar
- lubricating oil
The “3-2-1” means that out of one barrel of oil you get three barrels of gasoline, perhaps two of diesel and one of a by-product. The “6” is a cost multiplier. Take the price of oil, multiply it by 6, then back out the production costs of the 3-2-1. The remaining result is the crack spread. For most refiners, that spread was negative last year.
The Good, The Bad, and the Ugly
Most of the Atlantic and Gulf Coast refiners lost out because they use Brent crude (“American” oil), which, of course, trades on the world market and recently hit $128 a barrel. Refiners in the Midwest can use West Texas Intermediate (WTI), which was a lot cheaper than Brent for most of last year, when the WTI to Brent price spread reached $28 per barrel.
In fact, WTI was piling up in Cushing, Okla., the major Midwestern oil terminal, because there are no pipelines to the Gulf from Cushing. Western refiners were making a veritable king’s ransom until the spread between WTI and Brent narrowed significantly.
All is not lost in the near-term. Oil prices could retreat if conditions in the Middle East begin to ease. Fortunately, for now, the hit to the economy hasn’t materialized, although common wisdom says that for every $10-per-barrel increase in the cost of oil a 0.2% GDP loss occurs over the course of a year, according to Ken Greene, of the American Enterprise Institute, a notably CONSERVATIVE think tank.
Consumers are still spending less than 5% of their income on energy; they were spending more than 6% the last time we hit $4 gas, when oil topped $140 a barrel. So $4 a gallon won’t hurt as much as it did in 2008. But in the long term, global demand for oil will increase, driven by developing countries.
Greene goes on to say that even the most conservative economists agree that margin is being eaten up by the downstream supply chain and that producing more oil in this country would have little or no effect on gasoline prices.
Even as consumption has waned and production has increased, gas spike in the U.S. have become an annual occurrence; coming earlier and abating less with each passing year.
Since I addressed the fact that a handful of speculators, using very little actual cash, can tie up huge contracts of oil without ever having to take possession or even pay for it. They literally sell the product before they own it or have it, pay no finance charges, no transportation charges, no production costs, and no storage costs. Nooooo, nothing wrong with that system either. As long as somebody is making money off of it, it’s just Capitalism, right? Coughcoughcoughbullshitcoughcoughcough.
This all points to an inevitable conclusion that Republicans and their ardent, bumper-sticker followers either choose not to believe or are simply too ignorant to understand these facts.
For the immediate future and maybe longer, high gasoline prices are here to stay…and neither presidents nor pipelines can do much about it, despite the recycled lies of Sarah that have been passed on to Willard Mitt Romney.