Crude oil is getting cheaper — so why isn't gas?

NEW YORK – Crude oil prices have fallen to new lows for this year. So you'd think gas prices would sink right along with them.

On Thursday, for example, crude oil closed just under $34 a barrel, its lowest point for 2009. But the national average price of a gallon of gas rose to $1.95 on the same day, its peak for the year. On Friday gas went a penny higher.

To drivers once again grimacing as they tank up, it sounds like a conspiracy. But it has more to do with an energy market turned upside-down that has left gas cut off from its usual economic moorings.

The benchmark for crude oil prices is West Texas Intermediate, drilled exactly where you would imagine. That's the price, set at the New York Mercantile Exchange, that you see quoted on business channels and in the morning paper.

Right now, in an unusual market trend, West Texas crude is selling for much less than inferior grades of crude from other places around the world. A severe economic downturn has left U.S. storage facilities brimming with it, sending prices for the premium crude to five-year lows.

I was raised in Texas City Texas and can tell you that refiners of oil have to do maintenance on their equipment and they call it "shut downs" and "turn arounds". They are done for various reasons like switching blends or products for the upcoming season. The coming summer gasoline season may require them to switch blends or possibly make more gas than diesel, depending on the forecasts. If you were going to clean up or switch blends, what better time to do it than the spring. Most of this maintenance happens from Jan-Feb all the way to Apr-May.

If you, as a business, just took a bath on your earnings and have excess gasoline inventory at a higher price, wouldn't you choose to drag your feet during these times to flush the inventory out? They are purposely cutting back production to eliminate inventory during a slow economic time AND a slow usage season. You have to realize that much of the gas we have now was bought as oil at a higher price. There is oil inventory sitting in tankers right now that was bought at MUCH higher prices( aka $75-$100) At $35, they most likely are buying future hedges for the coming years, but they have problems right now. As the inventory shrinks, the price will make more sense as priced to oil. In fact gas may look like a bargain when oil rises and gas lags behind the oil price hikes. This isn't some cabal setting prices in smoke filled rooms but is the same thing any company does to control inventory.

If you have trouble making a profit, you drag your feet during a seasonal slow time to burn the inventory. It's done every year as it has been done forever. And yes, you will be pi$$ed off again when you find out the price of oil will return to their old high's, maybe higher, because drilling has been halted offshore. Windmills and solar panels will have NO EFFECT on what you pay at the pump. Drilling for oil or replacing the fuel is the ONLY cure for that. If oil stays this low or lower, we lose the Tar Sands, and other harder to refine sources and the bottom is at a higher mark than it would be if we were allowed to drill. Next we have the inflation bugaboo. With this "Save the Marsh Mouse and feed Acorn" stimulus bill passed, if we ever start to re inflate, it will be as bad if not worse than Carter's term. Oil will be priced in dollars and it will take more of them to buy the same amount of product. Gold, silver, and every other commodity,( including food), will rise in price probably to unheard of levels.

If we are Bitching about the price of gas under $2 a gallon, we are in for a BIG surprise. If we survive Obama, The US will look more like Viet Nam, than a western democracy.

Let’s be more reasonable then.. Let’s say that crude falls to $1.00/barrel because of some new amazing find or technology. What should the retail cost of gas be? Should it be $.10/gallon?

What would you say if it remained at $1.00 per gallon?

The wholesale cost could be zero, but that doesn’t mean all expenses are zero. Even if the wholesale cost where zero, with today’s prices, you still have about $1.40/gallon in other expenses before any profit is made.

This is why gas will always go up faster than it goes down in relation to crude prices Downward momentum has a limiting factor with all of the other expenses involved.

Lets just say the cost of crude is cut in half.

Then the cost of the raw material, oil, used in gasoline is cut in half. not rocket surgery, rigth?

OBVIOUSLY, that won’t result in gasoline prices being halved, but it should be a pretty big drop in gas prices, since oil is the main component of gas.

If the price of iron goes down drastically, I would expect a pretty significant drop in the price of steel.

chuckles

Don’t forget “Boutique” blends.

All Gasoline is not alike. Refineries have regulations about different fuel blends specified by the different states, even different cities in the same state to fight air pollution.

They cannot ship Tennesee gas and sell it in California “as is”

So they are stuck with inventory they cannot sell and is expensive to store.

Selling gas is alot more difficult than most people believe.

OBVIOUSLY, that won’t result in gasoline prices being halved, but it should be a pretty big drop in gas prices, since oil is the main component of gas.

Not necessarily because while oil is the main component of gas, it isn't the main expense in the retail cost of gas. Remember, that the profit per gallon of gas is only about $.10, not a lot of wiggle room.

Think about the life cycle of a barrel of oil after it is purchased by an oil company. That oil is transported across the world to a production facility. That production facility goes through an elaborate refining process. That refined product is then shipped to a retailer. The retailer has the operational expenses of rent, electricity, manpower, etc.

With all these expenses in mind, if, at $30/barrel, an oil company only makes about $.10/gallon profit, if the wholesale cost drops 50%, the end consumer would only see possibly a couple of percent drop in cost, top. A 50% drop in the wholesale product whose end result is $.10/gallon, would mean, at best, a decrease of about $.025/gallon.

IE, the end consumer may only see a 1/2% to 1% drop in end retail price even if the oil company sees a 50% drop in the wholesale cost of oil.

Especially with The Destoyer in the Whitehouse, with his crew of California moonbats in charge of our energy policy.

Hmmmm..

Energy Secretary Steven Chu born and raised in St. Louis, Missouri.

Carol Browner, born and raised in Miami, Florida

Lisa Jackson, born Philidelphia, raised in New Orleans.

Nancy Sutley from New York, head of the White House Council on Environmental Quality.

Oh and Nancy Pelosi? Born and raised in Maryland..

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