Tuesday, February 19, 2013

$4 gas is back, Jack

The media seemed to catch wind of the fact that gas prices have been on a steady march upward for the better part of a month when the price at the pump topped $4 again.

Yes, nationally the average price of a gallon of gas is still below $4 but in the major population centers, Boston-DC and the West Coast $4 has been the norm for the past week or so.

As my astute 10 year old asked the other day, "Why is the price of gas going up again?".

In the past it's been easy to point to something like a war, a threat of war, a hurricane, etc., to explain the spike in prices, but this time it's different.  There is no single bogeyman to blame.

I'll start by describing one city in one country.  In India the rate of car ownership today is about 85 cars per 1,000 people.  Compare that to a developed country like the US where we have 812 cars per 1,000 people.  Now remember that there are 1,240,000,000 people in India and while they may never get to a ratio of 800 cars/1,000 people, they are adding nearly 500,000 cars per year to the streets of the capital New Delhi every year.  Oh, and remember the rate of car ownership in that other sizable Asian country is also just 85/1000 people.

The point is that demand for oil is going to remain high for the foreseeable future and no matter how many Tesla's we buy there will be 100 Indians or Chinese buying a traditional gas engine (so they can sit in horrific traffic).

I mention this because I think it is important to understand that we are entering a period of persistently high gas prices regardless of our own production efforts.  However, this merely provides a baseline, it doesn't really explain gas spiking as it has in the past month. 

The steady refrain that I keep hearing is that the current spike in prices is due to oil prices and refinery shutdowns.

Well, the oil price argument falls flat in the face of facts.  West Texas crude was about $96.10 a month ago and it's $97 now.  Yes, the price of a barrel of West Texas oil is higher today than it was for much of 2012, but it's not meaningfully higher.  The average price in 2012 seemed to be between $85 and $92/barrel for much of the year.  Now for those of us on the east coast Brent Crude is the primary pricing mechanism to watch and Brent crude has basically flat lined for a year.  It was $118 a year ago and it's $118 today.  One of the issues we are going to have come to grips with in the future is that while the US is now producing a tremendous amount of oil, it is very difficult to get that oil to all of our refineries.  Thus, we are likely to have wide spreads in oil and gas prices around the country for years to come.

The refinery issue seems to be a convenient scapegoat.  There have been many refineries that have been operating at a limited capacity after Sandy.  There are also many refineries that tend to go offline at this time of year to retool for the summer driving blends.  There appear to be one or two unscheduled shutdowns but they are not enough to drive prices up 10% on their own.

Other factors - I suppose we should mention Mideast tensions although that seems like it's actually cooled off in the past month.  OPEC has cut their production targets, but with Brent at $118 you'll get lots of cheating by their members.  Finally, the US dollar has weakened a bit in the past month and that is likely a factor.  A serious showdown in Washington over the Continuing Resolution or the Sequester will likely further weaken our currency (and drive up gas prices).

So, I guess what I'm saying is --- there is no good reason for this move in gas prices.  There are a number of issues that are all convening to impact the price of a gallon of gas - OPEC production, refinery shutdowns, persistently high oil prices, weaker US dollar - but none of them alone should cause a 10% spike in prices.

Cheers!


Currency
Refineries
Oil

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