2005 September 08 Thursday
Why Gasoline Prices Can Rise Very Rapidly

John Maudlin explains why lines can form and gasoline prices can rise very rapidly in event of consumer worries.

On this note, let me quote from Stratfor.com about gasoline supplies, "The United States currently has commercial stockpiles of 194.4 million barrels of gasoline -- enough to substitute for the loss of Gulf Coast refineries for weeks even in the worst-case scenario. There will be supply disruptions in affected regions that are used to being net gasoline suppliers, not consumers, since adjusting will require a reversal of normal supply routes."

But as Dennis Gartman noted this week, there are 220,000,000 cars in the US. If everyone tops off their tank, and assuming that is an extra 10 gallons on average, that would be 2.2 billion gallons. Coupled with supply problems, this is a big hit. Of course, this sorts itself out in the medium run, but for a week or so it is a problem.

As long as gasoline prices are allowed to rise long lines at the pumps won't last.

Maudlin thinks high home heating prices will generate the votes in Congress to open up more of the continental shelf for natural gas and oil drilling.

As an aside, I hope President Bush's critics who roasted him for filling up the SPR will now admit he was right. It is in just such an unanticipated emergency that the need becomes apparent. Can you imagine what they would say now if he had not? I hope this also pushes Congress to act to open up the US oceans and coastlines and Alaska to drilling for oil and especially natural gas. There is enough gas in US waters and land to supply us for 20 years (400 trillion cubic feet of gas!). There will be the votes for it when it costs $500-$700 a month to heat the average home. And while they are at it, can they please make sure we have several pipelines and oil and gas ports on both coasts so one disaster like this does not threaten the bulk of American energy sources? The NIMBY forces (Not In My Back Yard) have got to be put under control for the sake of the country at large.

I suspect the Strategic Petroleum Reserve will end up paying back its cost since its oil will some day be sold at high prices after the world oil production peak has been reached. Though perhaps the government will hang on to the SPR until the economy has already mostly transitioned away from oil toward nuclear and solar power and oil prices have declined due to lack of demand.

Share |      By Randall Parker at 2005 September 08 01:54 PM  Economics Energy


Comments
Stephen said at September 8, 2005 10:03 PM:

The SPR is irrelevant to retail prices. Why?

First, its crude oil and there's plenty of crude available; Second, its crude oil so it still needs to be refined and its the refineries that are the bottleneck. Third, in these circumstances the SPR is not just given away, but its sold at market prices - not that any of the refineries would it because.... Fourth, its mainly sour and they prefer sweet which is amply available; Fifth, you're confusing/conflating 'commercial stockpiles' with the SPR; Sixth, it'll take several weeks before SPR crude could make it through the system into retail pumps. Seventh, well, I can't think of a seventh but I'm sure I could.

In short, this is merely a symbolic act designed to fool the rubes into believing that the Prez is doing something about petrol pricing.

Stephen said at September 8, 2005 10:05 PM:

oh, and another thing, guess which city houses the SPR's offices...

Stephen said at September 8, 2005 10:24 PM:

Randall, re-reading the above, I sound quite obnoxious. Didn't mean to and nothing was aimed in your direction.

Stephen.

Randall Parker said at September 8, 2005 10:54 PM:

Stephen,

I've debated with you long enough to know you aren't mean spirited. Don't worry about it.

Well, the argument that high gasoline prices are the result of refinery bottlenecks rather oil production bottlenecks runs into one basic problem: If more oil can be made than refined we'd expect to see oil prices decline. But oil prices have risen and risen. So I do not buy this explanation. Where's the big world surplus of oil backed up waiting to be refined?

A lot of oil production was knocked out by the hurricane. There are refineries that can handle the SPR crude. If there was not enough refining capacity to handle the crude then the government would have a hard time selling it.

You can't think of a seventh? The Violent Femmes guy couldn't remember what eight was for. Ten was for "everything, everything, everything".

Jody said at September 9, 2005 9:13 AM:

If I could "refine" Stephen's point, the SPR wasn't useful in this case (Katrina) because it holds unrefined oil and US refinery capacity was already pretty much maxed out before Katrina knocked some more refineries off line. We could've shipped oil off on the global market to less burdened refineries (and I imagine we did), but that's a couple week turn around and still will result in higher than pre-Katrina prices (though probably less than the price spike that immediately followed Katrina). (I'm actually not saying here that we would "outsource" our refining, though undoubtably some companies will, I'm saying that selling SPR reserves on the free market has that effect because of market pressures that drive foreign gasoline refining to the high priced locations - in this case, the US).

Thus, refineries were a (short-term) bottleneck to using the SPR to combat the short term price shock caused by Katrina's degradation of US refinery capacity.

However, this in no way contradicts Randall's analysis as I believe Stephen and Randall are discussing two different (though related) phenomena and over several weeks releasing SPR reserves should have a real effect.

Ron said at September 9, 2005 7:01 PM:

GREED thats why gas prices rise the ceo of exxon makes 31 mil a yr exxon made over 125 bil in profits in one quater.cut their profits by 20% and the ceos sal and see how fast gas will come down and then even i can afford to give to the (refugees) from the hurricane.Yeah refugees-- webster dictionary---one that seeks shelter.

Bob Badour said at September 9, 2005 7:14 PM:

Exxon made a 125 billion in a quarter and the CEO only makes 31 million a year? He's underpaid.

Randall Parker said at September 9, 2005 7:53 PM:

Ron,

You are just making up facts. No, Exxon never made $125 billion in a quarter. In the first quarter it hit $7.86 billion. That was up sharply from the previous year. But it was almost as high the year before that.

As for what those profits work out to: We use 20.5 million barrels a day in the United States. Suppose it averages out to $60 per barrel. That is 20.5 times $60 times 365 days or $448 billion per year spent buying oil. On top of that there are costs of transport of oil to off-loading points, refining, pipeline distribution costs, trucking to gas stations, and gas station costs. Therefore if Exxon did without all profits they'd barely make a dent in gasoline pump price.

Ron said at September 9, 2005 7:59 PM:

Bob no man is worth 31 mil

Ron said at September 9, 2005 8:00 PM:

Bob no man is worth 31 mil

Jody said at September 9, 2005 9:50 PM:

Is Bill Gates not worth 31 million? Would Sam Walton not have been worth 31 million? If you create a movie that everyone in America pays to see, are you not worth 31 million?

Suppose we use your numbers and an enterprise makes a profit of $600 billion in a year. You're saying it's unreasonable for the man at the top to take home 0.52% of the profit? (Really revenues should be the number used as any compensation paid to the CEO would reduce the profits)

Bartelson said at September 10, 2005 2:02 AM:

Jody, if a CEO drives his company into the ground, should he be penalized .52% of the losses he has created?
Most people have no problem with men like Gates or Walton being extremely rich as they were able to build their companies from the ground up. The CEO of Exxon is just another hired hand who got lucky that his product exploded in price. So he raids the corporate treasury before it all falls apart on him.

Ron said at September 10, 2005 8:09 AM:

Way to go Bartelson, OK heres the deal Jody,Just hire me to run Exxon,I will cut my salary to 1 mil 2 hundred thousand a yr. Roughly 25,000.00 a week, wow what i could do with that.I would then pass the savings on to my consumers.Just like Walton and gates done.They both got their products lowered.Don't you think you would like that.Also i would just build a levee around the downtown New orleans let the other be wetlands again and save the tax payers bil ,bil,bil dollors.Dam I'm sorry i just get so mad at these idiots.

Don said at September 10, 2005 8:54 AM:

Sorry, Ron, but cutting your salary to 1.2 $million and passing the savings on to consumers would cut the gas prices by less than a tenth of a cent per gallon. I'll take a dangerous leap and guess that you are not well schooled in basic economics. Not a problem. You have a lot in common with "these idiots" that you get so mad at.

Jody said at September 10, 2005 10:20 AM:

Ron: So now some men are worth $31 million....

On making the CEO pay for losses? Sure. But first we gotta outlaw corporations (that whole limited liability thing might get in the way). Somehow, I think that might be bad for the economy though...

Ron said at September 10, 2005 12:02 PM:

As for as new orleans most,not all but most are the lowest things on earth and it wouldnt bother me if another hurricane came thru and finished it off

Randall Parker said at September 10, 2005 12:44 PM:

Ron,

You are contributing nothing to this discussion except insults and made up false facts. If you post again I will delete your posts.

Ron said at September 10, 2005 1:00 PM:

Hey he started it by calling me a idiot. i was just stating things that are facts maybe not the excact figures,but most would know that gas prices are to hight made up by big oil


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