| The Storm Spike |
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| Fossil Fuels - Oil |
| Saturday, 13 September 2008 00:34 |
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If you"re wondering why the price of gasoline at your local stations has suddenly spiked, despite little movement in crude oil prices, and even if you don"t live anywhere near Texas and the path of Hurricane Ike, here are a few factors to keep in mind: 1. Although the price of oil is a major component of the cost of a gallon of gasoline, the crude and refined product markets are separate and distinct, and if there aren"t enough refineries to turn it into transportation fuel, the price of oil isn"t very relevant to the price at the pump. 2. US gasoline inventories were already extremely low, before Ike made landfall, both in absolute terms and in days of supply. That"s the result of months of high oil prices and weak gasoline demand, which together have crushed refining margins and made producing gasoline a break-even proposition. 3. Prices are set by supply and demand. At the moment, with many of the Gulf Coast refineries shut down, we are a nation that uses 9 million barrels per day of gasoline but has less than 8 million barrels per day of supply, including the million barrels or so we import every day, with any extra supplies from Europe and elsewhere at least 10 days away. When supply and demand are so mismatched and inventory so low, the only choices for rationing supply are rapid and significant price increases, or gas lines and run-outs, which we may yet see in some areas. Our gut instincts about "gouging"--fed by misinformed or cynical politicians--are deeply unhelpful right now. 4. Service station owners have also been squeezed between weak demand and high prices. When they saw spot wholesale gasoline prices spike over $4/gal. yesterday, they knew their next delivery was going to cost them a lot more. Stretched by months of weak retail margins, they are in no position to absorb that hit without raising prices in anticipation of it. If the Texas refineries haven"t sustained major damage, most should be able to restart within a week or two. Imports will increase in the meantime, and refineries not damaged by the storm can run at higher rates, to make up for lost production and rebuild inventories, allowing prices to come back down pretty quickly. If the damage turns out to be significant, however, we"re going to be paying a lot more for gasoline and diesel fuel for a while, no matter what happens to crude oil prices. |
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