I know some of you are wondering why gasoline prices have risen, when the price of a barrel of crude has reached a new recent low of around $100 per barrel. Last night I was discussing this with a friend of mine who runs a local hedge fund, and he made some excellent points.
The recent hike in gas prices has to do with the gasoline futures market, not the price of crude. As hurricane Ike approached the gulf, futures started to rise. Considering that close to 50% of our gasoline refining capacity is located in the gulf coast, as the storm approaches and the potential danger to refineries increases, futures go up.
From Reuters.com
Some 14 refineries with the capacity to process 3.8 million barrels per day– 22 percent of total U.S. refining capacity– were shut in precautionary measures ahead of the storm.
Yesterday, on the New York Mercantile, the price of gasoline futures rose .208 cents per gallon.
Economics 101:
When service station operators’ purchasing departments look for replacement product, it’s based on some fairly simple math. The price of what’s in the tanks needs to cover the cost to replace it, not what it originally cost.
Hence, the price of a barrel of oil alone does not determine the cost at the pump.
After Hurricane Ike leaves, it will take at least 10 to 14 days to restart refinery production, once workers return to the sites and electricity is restored, Lipow said.
And if there are damages, restoration of service could take several months, the analyst said.
Following the devastating back-to-back hurricanes Katrina and Rita in 2005, it took nearly nine months for normal operations to resume at all the affected refineries.
I wouldn’t expect a major decrease in pump prices for sometime.
AWB
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i would buy the futures going up just under 21 cents YESTERDAY. But gas started going up days before, like 20-25 cents a gallon.
Watching MSNBC for some time and watching the price of both crude and gas futures the following is fact. They both where at record lows over the last three months going into Friday. In fact early Friday they where still trading low.
Now for my spin –
Once the final path of Ike was pretty well set it was known the crude oil processing would end for a day or so. That as a mater of safety they would need to cut back or shut down the refineries. If they got a direct hit by a mjor hurricane then it could close them down for months.
Keep in mind we talked here about the price jump and yet nothing was said on national media (which was odd), and no national elected official said a word (which is odd because they love to talk, even if they don’t know what they are talking about). Leading some to believe someone knew what was going on and did not say a word. As for the national media I think they are just to dumb!
The first spike in gas was a form of volunteer rationing, by price. People that did not need the gas would set back for a few days to see if the price would drop. Hence, less gas would be taken out of now a fixed possible supply.
The next step was the 2nd jump for us but for others in the US their first jump. I checked gas buddy when we had the first jump here before I posted my second comment. In that search I found that Fla, NC, NJ (the only three east coast states I happened to punch up did not jump. In the midwest ND and Min. had not either. The reason I did not note in my post was I thought that they just hand not jumped the prices. But the rest of the states that I checked near our boarders had.
Well look where some of the “rationed” and price gouge type practices are going on. The east coast has the highest demand area that did not two step. So to cut their drain on the run on gas they jumped or went to ration mode.
Yes, I think big oil had a roll in this and so did the White House. I could argue if it was right either way. But it is one way to “ration” what is left. My problem is when all is past that the increase for ration purposes is returned via lower prices?
Hay, is one more for you. How many gas companies lost their credit card systems yesterday. I was told by the people working at the local BP they lost the credit card system nation wide and as of seven this moring it was not back up. One more element to possible ration system.
Just heard from my wife the BP near us just went to 4.16 this afternoon.
The wife and I JUST missed the hike to over $4 by about an HOUR!
And we didn’t get nailed by the credit card “outage”.
Talk about “luck”.
There is foul play afoot here, make no mistake…and it’s directed at every one of “US”.
B.G.
Dan,
While your facts explain a lot….Lets look at something else. The last time Oil was sub $100.00 a barrel. We were paying just over $3.00 a gallon. Now figure that a week ago (before Ike), Gasoline futures were sitting at around $2.70. Add Indiana and Federal Taxes and a fairly common $.05 a gallon for transportation and we should be sitting at $3.30 a gallon. Yet gas locally was sitting at $3.85. Time for the BP’s and Marathons to explain that.
Second issue, while the rest of America was gauging customers…as reports indicates stations in Michigan, Kentucky, Alabama and the Carolina’s were selling gas for over $5.25 a gallon…stations in and around the Houston and Dallas areas were holding steady at under $4.00. Those would have been the areas impacted most as their production is shut down.
Lets complicate the matter more and throw in the fact that it has been reported that there is a nearly 14 day surplus of gasoline in the US because of slowing demand. That surplus should carry us well through the “shut-down” period as my feeling is some of the refineries will be ramping up production by early next week as Ike’s major damage was caused by flooding, not wind. And that 14 day surplus is calculated assuming no production for 14 days to my understanding. US production at most has only been uct by 50% so that should actually translate to an almost 28 day supply.
So the only thing going on here Dan is the gas station owners are making a few extra (probably 10 or 12) cents because they can and the big oil is taking the opportunity to eek and extra 1 or 2 percent profit.