It’s March. Gasoline demand is weak, and inventories of the fuel are comfortable with higher imports, but the price is close to $1/gal higher than it was this time last year.
It doesn’t follow market logic, and few drivers enjoy paying more than $3/gal to fill up their auto’s fuel tank.
An internet search for “gas price” returns 2.57 million results in just 0.23 sec. The first page of results shows sites that offer to find the cheapest gas in a given area. There’s another site that will calculate how much gas a car might require to get from one city to another.
And then there’s the Gas Price Watch Reporting Form from the US Department of Energy. This web page states: “The Department of Energy is very concerned about the impact of gasoline prices on American families. While we are working to address longer-term supply issues, we’re also working to make sure American families are being treated fairly. If you believe there may be price-gouging, or price-fixing, please contact your local authorities and fill out the form below.” Then follow the fields in which to report the offending station.
But again this year, as during price spikes in recent years, Congress wants to round up oil company executives for hearings on why fuel prices are so high.
The reasoning is repeated daily in the popular press. Gasoline prices follow the price of crude—a commodity that is currently in high demand worldwide. The dollar is weak, further boosting the price of commodities traded in the currency. Refinery problems sometimes cause supply disruptions. And so on.
Consider the movement of crude futures around the announcements of interest rate cuts by the Federal Reserve. If the market anticipates a rate cut, then traders bid up the price of crude because it would be a sign of further weakness in the US dollar more so than because it would be a boost to an economy that would require more oil products.
“Oil has become the ‘new gold’—a financial asset in which investors seek refuge as inflation rises and the dollar weakens,” said Daniel Yergin, chairman of Cambridge Energy Research Associates and executive vice-president of IHS. “The credit crisis has been fueling the flight to oil and other commodities, and that will last until the dollar strengthens or the recession becomes more pronounced,” Yergin said.
Refining losses
Meanwhile, integrated oil companies aren’t making much money from their refining and marketing operations. In fact, refining is what pulled down many firms’ earnings in the fourth quarter of 2007. Independent refiners lost money not only for the quarter, but also for the entire year (see story, p. 31).
Refining margins sank during last year’s final quarter, as feedstock costs soared to record highs. US refining margins posted sharp declines from their second-quarter 2007 peaks.
For example, the US Gulf Coast cash refining margin fell to average $8.11/bbl in the fourth quarter of last year vs. $19.68/bbl in the second quarter, according to Muse, Stancil & Co. Meanwhile, feedstock costs in the same region averaged $89.40/bbl in the fourth quarter, up from $71.64/bbl in the second quarter of last year.
Refinery utilization is lower, too. Last month, it averaged 85.6% in the US, according to the American Petroleum Institute. For all of 2007, utilization averaged 88.5%.
In its most recent Monthly Oil Market Report, the Organization of Petroleum Exporting Countries said the decline in refining margins over the last few months has negatively affected refining operations across the board, leading to early maintenance, especially in the Western Hemisphere.
Further, the report said the current conditions of the product markets (i.e., sluggish demand) and refining margins may encourage more discretionary cuts to utilization in the near future.
