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.
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… ;-)