Why Gasoline is Expensive

Obama and friends are all over the idea that “Oil Speculators” are the reason gasoline prices have been driven up so high.

It’s become a political theme for them.

One Small Problem. Oil isn’t the cause. It isn’t all that high and has been substantially flat while gasoline has skyrocketed in comparison.

This chart shows about a Half Decade of Gasoline UGA vs Oil USO and Heating Oil UHN in the USA. Those tickers are exchange traded funds that buy futures in those commodities. They directly reflect the market prices and where any speculation might be happening.

4 years of Gasoline vs Oil

4 years of Gasoline vs Oil

Notice that we had a big oil spike about 4 years ago. Back when it hit about $140 / bbl. Then the inevitable crash after the bubble. Notice that gasoline and heating oil fairly tightly followed the oil prices. They were coupled.

Then something strange happens.

In early 2009, while oil stays more or less flat (though with a wobble) gasoline starts a long steady rise. Heating oil rises too, but not quite as fast. Heating oil is very similar to #2 Diesel Oil (in the past they were the same, other than some marking dye and a bit of particulate filtering. Recently Diesel must be ultra-low sulphur, so gets some added processing.)

At the moment #2 Diesel at retail sells for more than Super Unleaded Gasoline ( I buy both). That is not justified by the present price of heating oil base stock. This also implies that exports of Diesel to Europe are not sufficient to raise the #2 base stock price. It is not limited by the availability of #2 base oil, nor by the price of crude oil. Gasoline is even more disconnected.

There is a dramatic disconnect here between the underlaying commodities and the end products. That disconnect happens at the refinery. (This also shows why Delta Airlines was unhappy with their ability to hedge kerosene based on crude oil contracts).

So what happened in late 2008 / early 2009 that would possibly reduce the ability to build and expand refineries and / or might induce companies to do that investment in some OTHER country instead of here? Any ideas? ;-)

One thing that is quite clear to me from this chart is the simple fact that OIL speculation has done nothing to the GASOLINE price. It is moving independently of oil. The “fix” is not lower oil prices or limit oil speculation. At most that will increase the profit of oil refiners. The “fix” is to make an environment where investment in new and expanded refining capacity is attractive. Reduce the regulations. Stop demonizing the oil companies and refiners. Bring stability to the business climate (and maybe even appreciate the work they do…)

When you go to fill up your car, remember this chart. It’s not about the price of oil. It’s not about the speculators. It IS all about abusing refiners and convincing them this is a bad place to do business or add capacity.

Is there SOME external impact from exports of products? Yes, a little. But if we had easy refinery growth, that would have no impact.

From the Oil Inventory Highlights report this week we have a small reduction in gasoline produced, a small increase in ‘other products’ made, and a small increase in exports of those ‘other products’. What they are is a bit unclear.

That some refinery capacity has been switched from gasoline to ‘other products’ for export will have had an impact. That the refineries could not expand to adjust is causal of the price moves.

Products Supplied (Thousand Barrels per Day)
                           Four Weeks Ending
                           5/4/12 4/27/12 5/6/11
Motor Gasoline              8,707   8,661  8,995
Distillate Fuel Oil         3,830   3,824  3,878
All Other Products          6,155   6,307  5,967
Total                      18,692  18,792 18,840

So gasoline down about 288 th bbl/day. “Distilate” that is stuff like Diesel and heating oil about unchanged. “Other Products” up about 188 th bbl/day. Total down 148 as well.

Net Imports (Thousand Barrels per Day)
                        Four Weeks Ending
                        5/4/12 4/27/12 5/6/11
Crude Oil                8,779   8,668  8,756
Petroleum Products        -941    -897    617
Total                    7,839   7,772  9,373

Petroleum Products have gone from net imports to net exports. We’re importing about the same amount of crude oil, but have stopped importing products and instead are exporting for a net swing of about 1558 th bbl/day.

Basically, we’re a lower cost producer of products than some other places, now, and they will pay more for other products than we will pay for gasoline and Diesel oil, so we’re exporting it. We are not building new refining capacity to meet that demand (so not employing folks to build and operate it) so the exports show up as price hikes.

In a normal economy, we’d be adding refining capacity and exploiting those market prices overseas to become a larger producer of products. In an over regulated economy we suffer excessive price hikes until our prices rise enough to match the overseas prices. When capacity is not added, and demand rises, so do prices.

This has nothing to do with speculators and a whole lot to do with barriers to entry in the refining business and barriers to adding capacity. Interference with normal market forces.

How to fix it? Build more refinery capacity. Reduce barriers to doing business.

It would be interesting to find out what those “other products” are that are being exported.

But at least now we know why it makes sense for Delta Airlines to buy an oil refinery. There are ‘excess profits’ to be captured from vertical integration of their supply chain. Those profits will exist as long as refinery capacity is constrained. As it takes years to build a new refinery, that’s likely to be a safe bet for at least 5 years, and probably for a decade plus.

h/t Randall for asking the question that sent me off looking at this… ;-)

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About E.M.Smith

A technical managerial sort interested in things from Stonehenge to computer science. My present "hot buttons' are the mythology of Climate Change and ancient metrology; but things change...
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18 Responses to Why Gasoline is Expensive

  1. E.M.Smith says:

    Odd… the integrated oils and refiners are not showing a lot of “bump” out of this…
    5 year chart of some of their tickers.

    So where’s the money being hidden?… COP has a P.E. of 5.6 at the moment…

    I suspect there may be a “value investment” in there somewhere…

  2. E.M.Smith says:

    Looks like Propane / Propylene is a candidate. From:

    Click to access wpsrall.pdf

    Propane/Propylene 6 …………………………………….. 1,236 1,202 35 1,063 16.4

    Last year 1,063 this year 1,236 so a significant gain. Footnote 6 though is interesting:

    “6 Includes propane/propylene production from natural gas plants.”

    So we’re turning more of our natural gas into chemicals and shipping it. Otherwise it is just flat to slightly down refining capacity…

    Also distillate oil is up about 200 but mostly in high sulphur stuff we can’t use here. I suspect more heavy sour coming in and not enough desulphurizing to clean it up, so we export the heaviest sourest stuff for use in places that don’t care (like bunker fuel oil at sea).

    “> 500 ppm sulfur ………………………… 356 308 48 266″

    So up from 266 to 356.

    OK, makes sense to me. Tighter rules on what fuels can be sold here. Limited ability to adjust refining capacity. More “stuff” must be exported to less picky places. All of us get to fight over the limited ultra clean fuels available. Oil price just not important to that dynamic.

  3. R. de Haan says:

    I have come to the same conclusion. The bottle neck is in refinery capacity in combination with exports. The netire problem of high gasoline prices is man made (read Government made).
    Hopefully the laws and Federal Redtape allows for gas to liquid at any scale. Natural gas and shale gas has arrived at bottom prices and any “added value” will be greeted with open arms by the industry. Unless they hae made a deal with the Obama Administration not to do so.

    In Europe, clearly a reduction in refinery capacity and taxes are making the difference keeping gasoline and diesel proces high. More tax increases are planned in many countries and the public is turning from red to white hot with the high prices. We are on the verge of fuel (and energy) riots. Anger among the people is not the only driver. Trucking companies and cab drivers can’t retrieve the addition costs from their customers and many are on the verge of bankruptcy.
    Truckers and cab drivers don’t give up wiyhout a fight.

  4. Stirner says:

    (sorry, posted this in the wrong thread)

    The Marcus Hook refinery just up the road from Delta’s new refinery is currently for sale. Currently it is being shopped around as a transfer and storage point for Marcellus shale gas. If this analysis is correct, then the refinery would be a logical candidate for US Air to purchase, given that PHL is a major US Air hub.

  5. Hugo M says:

    E.M., can you find out whereto the propane and propylene had been exported? China?

  6. E.M.Smith says:

    @Hugo M:

    I tried, but no joy yet. Best I can do is this graph of total propane imports / exports by country. Japan is #1 and China #3 (USA is #2, so exports?)…

    http://www.nationmaster.com/graph/eco_wor_tra_imp_liq_pro_but-trade-imports-liquid-propane-butane

    With nuclear off line in Japan, and China buying anything that burns, my guess would be those two. As both have large plastics industries, I’d expect the propylene to be headed there too.

    @R. de Haan:

    I’d expect to see some kind of general “fuel strikes” soon… and folks starting to make gasogenes again ;-)

    @Stirner:

    IMHO, it will depend on who gets a bonus for what… though the idea looks like a good one to me.

  7. pouncer says:

    Utterly random comments:

    Methanol as a fuel or fuel-blend in IC engines would provide a nice stepping stone toward a methanol-converting electrical fuel cell.

    Regional formulation regulations, which prevent this region but require that region to add more or less ethanol or methanol to gasoline refined to be sold within that region, sure plays holy havoc with ordinary trade. A refinery that could make whatever it thought it could sell, whenever to whomsoever, might be able to bring out a cheaper, better, product.

    I pray petroleum reserves last at least long enough for the whales to complete their comeback.

    Pipelines are another example of the category of “road” I should have mentioned in commenting on another thread. Mea culpa.

  8. Randall says:

    Nice analysis. It’s saddening to see refineries close along the East coast, with the loss of generally well paying jobs. However, our friends along the Gulf are debottle-necking and happy to pipeline product to them at higher margins. The refinery business is cyclical and cutting capacity has actually improved its overall health, so there isn’t much incentive to build capacity and cut margins. I like what Delta is doing. They are taking a risk, and that is the way the market is supposed to work.

  9. E.M.Smith says:

    @Randall:

    Glad you liked it.. It was an interesting path to trod…

    I’d not want to be in the refining business. Too much regulation when times are good, and too much cutthroat competition when things are overbuilt…

    @Pouncer:

    Back in the ’80s, when the bulk of the country was headed toward Ethanol (sop to the ‘flyover country farm states’) in Kalifornia we were going our own way. For reasons only they could explain, the State of California decided Methanol Flex Fuel was the way to go. ( I’d guess because coal, natural gas, and trash are easily turned to methanol and we don’t care about hard cold weather starting ;-)

    So Methanol Fueling Stations were put up between Sacramento (our State Capital) and the main destination of Government Cars. San Franciso (party!) and L.A./Hollywood (Shmooze and collect donations!)

    I even looked at the ‘3 way’ flex fuel cars offered by Dodge/Chrysler, VW, and, IIRC, FORD. About a $400 ‘uplift’ and you needed to use a ‘special oil’ that could cope with the added acids from methanol.

    Well, I wanted one. So I decided to visit the local Methanol station. (76 Station about 5 miles from my then home).

    That’s when I found out they were screwing the pooch again. To buy methanol, you could only do it with a “Special” card from The State. ALL purchases would be tracked and you could not just pay cash or use a credit card. Why? “Why, don’t ask why. Down that path lies insanity and ruin. -E.M.Smith”.

    At any rate, not wanting Big Brother riding around with me, I didn’t buy the car. (Got a nice new Honda Civic instead).

    You can still see M signs along the freeway. The local 76 pulled the pumps, but some of the others might still be in service. Maybe…

    So the end of the story is just that “we tried that” and intrusive government stupidity killed the program. People stayed away in droves….

    Per Methanol:

    There is ZERO problem with running it as a motor fuel. It does take a motor designed for it, though. It is a bit more corrosive than ethanol, and that makes it significantly more corrosive than gasoline. Special rubber needed in the fuel systems. Avoid aluminum. Use stainless steel injector pipes and parts. It tends to make formaldehyde and some interesting acids in the exhaust and ‘blowby’ into the crankcase, so special oil and good exhaust catalysts.

    But you can’t just dump M10 into your present car without fuel system damage. You can put in E10 fairly easily.

    Still, the technical issues were all solved back in the ’80s. Until recently, drag racers all ran on it. Now there’s a move to ethanol for political correctness reasons.

    Ethanol IS a better fuel (especially in high compression engines designed for it…) but methanol is a whole lot easier to make from coal and natural gas.

    If we wanted to do so, we could have a rapid conversion to a methanol fueled fleet nearly trivially. But between oil companies who don’t want to promote coal / natural gas and government being stupid, we don’t.

    But not all countries are stupid:

    http://green.autoblog.com/2009/11/10/china-turns-to-methanol-for-flex-fuel-cars/

    http://community.nasdaq.com/News/2012-02/after-lng-china-test-drives-methanolfuelled-cars.aspx?storyid=124163

    After implementing the use of liquefied natural gas ( LNG ) powered public buses in Beijing, China, whose energy consumption rose by 7 per cent in 2011 over a year ago, will conduct a trial run of methanol-fuelled cars in three provinces effective March 2012.

    The Ministry of Industry and Information Technology (MIIT) of China announced on Tuesday the trial runs of the methanol-fueled vehicles will be staged in the northern Shanxi and Shaanxi provinces and eastern Shanghai city in a bid to evaluate the safety of the vehicle and the alternative fuel. The evaluation period could last in two to three years, the official Xinhua news agency reported.

    “Shaanxi, Shanxi and Shanghai all have accumulated abundant experience in developing methanol-related technologies including methanol-fuelled cars,” the MIIT said.

    Coal-rich Shanxi province, according to MIIT, has a total of over 40 methanol fuelling stations, while neighbouring Shaanxi province has seven existing methanol gasoline blending centers.

    Which just leaves me wondering if thats where our Propane is going… to China for LPG cars…

    Even if we WERE at Hubbert’s Peak, it takes as long to ramp down the back side as to climb the front. That makes it about 200 years from now that well be sucking the last. Unless we are not at the peak yet…

  10. Roger Sowell says:

    Sorry, Michael, but off by a mile on this one. We have excess refining capacity in the US. So much so that refineries are shutting down. New refineries or expansions are postponed indefinitely, except for one caught midway through construction. It just began operation about a week ago.

    No one in their right mind builds new capacity in this environment. There was a major refinery fire in Washington near Seattle that removed some capacity and increased prices a bit. That refinery is now running, but others are offline for repairs.

  11. E.M.Smith says:

    @Roger Sowell:

    Source for that statement that we have excess capacity?

    All I have to go by is that product is down (see the reports where, for example, gasoline production is down from 8,995 to 8,707 from 2011 to 2012).

    So either there is not the capacity, or it is just not being used. Pick one.

    If it exists, but is not being used, that’s a pretty big indictment of the refiners. Crude is, per the graph above, roughly the same as in 2009 Autumn while gasoline moved from about $1.80 / gal when Obama came in to near $4 now.

    So you saying the refiners are deliberately holding back capacity and screwing with the public? Or what?

    I freely admit that I’m speculating that the capacity does not exist (as I’d expect a manufacturer to book all the sales it can at these prices). I’m equally open to collusion among the players to restrict production; but I’d like to have a reference for it…

    from the detail report:

    Operable Capacity1 .............................................. 17,312 17,315 -3 17,698 -2.2 17,584 -1.5 17,314 17,694 -2.1
    East Coast (PADD 1) ......................................... 1,188 1,188 0 1,580 -24.8 – – 1,188 1,580 -24.8
    Midwest (PADD 2) ............................................. 3,663 3,663 0 3,721 -1.6 – – 3,663 3,721 -1.6
    Gulf Coast (PADD 3) .......................................... 8,725 8,725 0 8,646 0.9 – – 8,725 8,642 1.0
    Rocky Mountain (PADD 4) ................................. 623 623 0 624 -0.2 – – 623 624 -0.2
    West Coast (PADD 5) ........................................ 3,113 3,116 -3 3,128 -0.5 – – 3,115 3,128 -0.4
    Percent Utilization2 .............................................. 86.4 86.0 0.5 81.7 – – 88.4 – – 85.4 82.4 – –
    East Coast (PADD 1) ......................................... 83.1 80.3 2.8 68.1 – – – – – 81.9 62.8 – –
    Midwest (PADD 2) ............................................. 92.7 97.1 -4.5 85.8 – – – – – 96.0 87.5 – –
    Gulf Coast (PADD 3) .......................................... 87.0 84.3 2.7 83.9 – – – – – 84.7 84.5 – –
    Rocky Mountain (PADD 4) ................................. 82.8 85.2 -2.4 81.4 – – – – – 85.2 80.0 – –
    West Coast (PADD 5) ........................................ 79.6 79.7 -0.1 77.6 – –
    

    Doesn’t look like a lot of change yr/yr and utilizations are about what I’d expect.

    Wonder where I can get a copy of that report from 2009…

  12. E.M.Smith says:

    http://www.eia.gov/dnav/pet/hist/LeafHandler.ashx?n=PET&s=MOPUEUS2&f=M

    looks to me like were smack dab average utilization percentage of the last 26 years. (And frankly, I suspect those 100% peaks in 1998 are suspicious. You just can’t have an entire industry running at 100% capacity, something is always needing repair, blowing up, or just not running right…)

    So I stick by the statement that we’re making less gasoline and more high sulphur stuff that has to be exported and running the refineries at the typical pretty much normal – full rate.

    Though like I said, I’m open to evidence of collusion to restrict production and raise prices. If you can show that, an anti-trust suit ought to be profitable…

  13. Roger Sowell says:

    E.M., yes, always request references. You have the right data in the capacity, and the key is utilization. Refining in the US is at a low in utilization, it has been in the mid-90 percents “normally.” for this time of year. EIA has graphs of historic utilization. Refineries cannot break even at these low rates.

    I’m on a smartphone tonight so cannot easily provide the EIA link to capacity utilization.

    Yes, I suspect but cannot prove the refining companies want Obama out of office and will increase gasoline prices to $5 or $6 per gallon before the election. A few well-timed equipment breakdowns is all it takes. It is now illegal to run an unsafe refinery so shutdowns can be justified for almost any reason. Obama stated gasoline prices must increase to be on par with Europe, so $8 or $9 gasoline is his target. Careful what you wish for. This will likely cost him the election.

  14. A C Osborn says:

    I do not see any breakdown of the Gasoline prices in terms of
    Crude price
    Cracking Price
    Distribution Price
    Tax
    With profits made per section.
    I have seen this kind of analysis for the UK & Europe and by far the biggest chunk is tax.
    So are your gas prices pre-tax?

  15. E.M.Smith says:

    The UGA is wholesale Exchange Traded Fund in regular unleaded, pre tax.

    In the USA, the tax runs about 40 cents to 80 cents / gallon (from memory) and varies by state. So at present ‘wholesale’ is about $3.75 (last time I looked) but sells for $4.20 retail near me.

    Crude is a 42 Gallon bbl, so 100 / 42 = $2.38 (more or less. Prices vary constantly) With some of the processing done, you get more gallons out than go in. (adding hydrogen and shortening the aveage molecule length turns density lighter.) But as a “first cut” estimate, that makes the delta from crude to wholesale about $1.50. How much of that is ‘crack spread’ and how much transportation? It will vary by refiner and location. If you want more detail than that (with profit margin at each step) I suggest you start doing the homework yourself as I’m not that interested in it and won’t put my time into a highly intractable problem. (Just how much of Exxon global profit comes form the Texas refineries and how it is apportioned between the products and their own shipping? Good luck sorting that one out if you are not in the Exxon board room…)

  16. p.g.sharrow says:

    Does anyone have any recent information on a very large refinery complex being built in India. The story I read last year was that it was to run heavy sour crude from Iran? It was projected to increase the worlds refinery capacity by 20%, hard to believe size. and go on line this summer.
    A different article last summer mentioned that Iran was tying up tankers as anchored storage of heavy crude that they could not move at that time.
    I haven’t heard of anything since on this information. pg

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