Posted on 09/09/2005 6:50:08 AM PDT by forty_years
Crude oil prices struck a record high of $70.85 in New York trading on August 30. If you believed all the hype surrounding the aftermath of Hurricane Katrina – e.g., it was Bush’s fault and the economy will be in ruins – well, you may just have been a victim of the TV talking heads’ hysteria, and that of the New York Times, LA Times, etc., etc.
A few days after Katrina ravaged the Gulf Coast, the news networks kept showing the “startling” image of a gas station sign advertising $5.87/gallon – I believe it was in Atlanta. Of course, this was a price-gauging aberration being peddled for its shock value. A headline on CNN Money this morning reads, “Gas prices continue to fall - AAA report: Price of regular unleaded gets closer to $3-gallon; higher octane fuels follow:”
The nationwide average price for a gallon of regular unleaded gasoline on Friday fell to $3.018, a little more than one cent less than Thursday's price of $3.03, the travel club reported.
The price has dropped nearly 4 cents a gallon since reaching a record of $3.057 on Monday, according to AAA, formerly the American Automobile Association.
So why are gas prices receding, despite the fact that the world is coming to an end? Again, CNN Money:
Despite the larger-than-usual drop caused by Hurricane Katrina, crude supplies remain well above the upper end of the average range for this time of year, the EIA [Energy Information Administration] said.
The EIA issued a report yesterday on current oil inventories:
Gasoline futures also tumbled immediately after the 10:30 a.m. ET report, falling as low as $1.96 a gallon on the NYMEX, but they turned around to end the trading session 2 cents higher at $2.04 a gallon.
Crude stocks fell by 6.4 million barrels, gasoline stocks fell by 4.3 million barrels and stocks of distillates decreased by 800,000 barrels, according to the Energy Information Administration.
Analysts were looking for a drop of 6.4 million barrels of crude, 6.2 million barrels of gasoline and 2.6 million barrels of distillates, according to Reuters.
So much for the “analysts.” As to the conversion of crude oil into gasoline by refineries, and to the delivery of gas through pipelines, which of course was prognosticated to never return:
The energy industry's desperate push to recover from Hurricane Katrina began to pay dividends Tuesday, as nearly half of the refineries fully or partially closed by the storm returned to service. …
One key to recovery efforts has been the return of closed crude and petroleum product pipelines, which previously created supply bottlenecks. Two of the most important, the Colonial and the Plantation, are now back at 100 percent capacity.
Natural gas pipeline operators also said that shipments continued to increase, adding that initial inspections uncovered few instances of substantial damage.
Hurricane Katrina was a terrible tragedy for Americans, no doubt. But running around screaming, pointing fingers, and distorting the facts is just throwing gasoline on the fire, if you will excuse the oil pun/inference. The Katrina scare holds about as much water as Bob Woodward’s charge that President Bush and the Saudis had a secret “deal” to keep oil prices low in the run-up to the 2004 presidential election, if you will excuse the flood pun/inference.
http://netwmd.com/articles/article1165.html
The oil shortage myth... :-)
I know the Katrina oil shock is temporary and will recede relatively quickly... but that doesn't explain why oil prices are still 3 times as high as a few years ago. Why has that happened?
In fact, one item in the last few months that has received almost no attention is that Canada has surpassed Saudi Arabia as the largest supplier of oil imported into the U.S.
That doesn't explain why gas has tripled globally.
One explanation: Much higher demand in China and India. Both nations comprise almost half the world's population. Demand has been higher in the U.S., too.
The demand increase in China/India is not a new phenomenon and the demand increase in the US is not exceptional. I'm still baffled.
That's easy - CYA. Make up for the price increase in Decemeber, ASAP - which means today.
Much of the fuel that is purchased these days is purchased as part of long-term futures contracts, and the terms of these contracts may be having a huge impact on pricing. I'll try to give you an overly simplified example:
Suppose I own a trucking company and we use 100,000 gallons of diesel fuel every month. If the market price of diesel fuel is $1.50 per gallon, then I'm spending $150,000 per month on fuel. Also, suppose I'm buying my fuel from a supplier who sells a total of 200,000 gallons of diesel fuel every month -- which means his total gross revenue each month is $300,000.
Because fuel costs tend to fluctuate dramatically over a long period of time, I would be willing to pay a premium on the cost of my fuel in exchange for some certainty about future costs. So maybe I go out today and buy a five-year contract for fuel at $1.75 per gallon, which is more than the current price but guarantees me a five-year supply of fuel at a fixed cost of $175,000 per month. I'm basically paying my supplier a "fee" of $25,000 per month to assume the risk of future price increases. The supplier's other customers continue to buy fuel on an as-needed basis, paying $1.50 per gallon.
Now let's fast-forward a little bit. Suppose the market price for fuel rises to $2.00 per gallon three years into my five-year contract. Under normal circumstances, my supplier would see his gross revenue rise from $300,000 to $400,000 (assuming he still sells 200,000 gallons per month). However, the supplier is selling me fuel at $1.75 per gallon under my contract and is taking a theoretical "loss" of $0.25 per gallon -- which he will then try to cover by selling his non-contract fuel for a higher price. Since my $1.75 contract is generating $175,000 in monthly revenue for him, he'll have to charge the "non-contract" customers $2.25 per gallon to recover his "loss" and generate the $400,000 in gross sales. The more dramatic the increase in the market price of fuel, the more money I'm saving at $1.75 per gallon -- and the more the supplier has to charge his "non-contract" customers just to make up the difference. If the market price of fuel rises to $3.00 per gallon, then he must charge $4.25 to "pay" for the 100,000 gallons he's selling to me for $1.75 per gallon.
Multiply this effect by a large number of suppliers who have signed a large number of long-term contracts at very good terms (for the buyer, that is), and you can see how this would have a cumulative effect on short-term prices.
The problem with your analysis is that these price differentials don't seem to show up at the consumer level. Where are the lower retail fuel prices being charged by those smart companies who locked in a long term contract??
Yes, it is new... It's the tipping point phenomenon.
Asia had been able to increase Asian energy production with the revenue created by Asian growth. It no longer can. The result is that Asia has begun to consume massive quantities of the global oil supply. a marginal increase in oil consumption can create an enormous increase in oil deficit.
Say I'm using 100 zillion units of energy, but producing 98 zillion units of energy. The rest I make up for by buying oil. As my economy grows, I use 120 gallons, but produce only 110. My energy consumption has grown only 20 percent, but my oil consumption has grown 500 percent.
That's what China just did.
This type of buyer probably isn't very common in the gasoline business, but I suspect that gasoline prices are being driven up because gasoline users are competing for the same oil that is being used for other products that are purchased in large quantities under long-term contracts (diesel and aviation fuel, for example). This would explain why oil prices rise even you would expect them to fall in a situation where refining capacity is constrained.
Simple collusion with greed and speculation of the rich and powerful to create an artificial run up of oil futures to make profits from the oil derivatives and for rich companies and individuals and countries with the cash to invest in US T-Bills and bonds to finance the federal deficit spending coupled with trade deficits of our Congress and the WOT. It's how the global economy works with well paid individuals to keep an eye on those who try to skim too much from the top. Why else do we see such an all out effort for corporations and governments to maintain contact for insider information on policy changes to those on Capitol Hill for anything else otherwise? Get the picture.?
Bottleneck, too: The oil companies haven't exactly been rushing to build new refineries. It is nice having high prices.
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