Wednesday, May 09, 2007

Oil and gasoline price update

The US Energy Information Administration issues a weekly report called "This Week in Petroleum" which contains price data and commentary on crude oil and related fuels. In particular, it includes several useful charts which I include from this week's report:

The commentary notes that "At $3.054 per gallon on EIA’s latest weekly retail price survey (May 7), this price is just a penny-and-a-half shy of the all-time record (in nominal dollars) of $3.069 per gallon set on September 5, 2005, about a week after Hurricane Katrina ravaged Gulf Coast oil production and refineries."

It also notes that "Both of these prices, however, fall short of the price of gasoline in March 1981, however, if adjusted for inflation. Retail prices that month were equivalent to a current price of over $3.22 per gallon after adjusting for inflation." Given that fact, we as consumers really have no basis to complain about gasoline prices.

When you look at the gasoline price chart, it is easy to see the price spike after Katrina; however the chart shows the gasoline price in June 2005 at under $2.20 a gallon; in June 2006 at a little under $3.00 a gallon and here in early May 2007 over $3.00 a gallon. It seems to me that the early summer price should be reverting to the 2005 level. The EIA's explanation for why this isn't happening is "Demand has been outpacing supply, causing gasoline inventories to drop from well above the average range to well below it"...which seems odd because theoretically we should expect to see some drop-off in miles driven by the public due to the high prices and there should be some effect from the increasing number of more fuel-efficient cars being sold. On the other hand there have apparently been problems with refining capacity which would explain the supply-demand gap. However, the EIA's Weekly Petroleum Status Report for May 4th shows refinery capacity utilization at 88.9%. It seems possible that due to the housing boom of the last couple of years that commuters are living farther from their workplaces and thus secular demand for gasoline has increased, but I don't have any hard numbers for that hypothesis. If you had moved further out to find affordable housing, your demand for gasoline is pretty inelastic.

The other chart that seems strange is the one showing US crude oil stocks. The number has been at or above the top of the average range for an entire year. I would think that in the face of high crude prices, refiners would draw down their inventories to avoid having to buy crude until stocks were at least near the bottom of the average range. Otherwise they are eating storage costs for the crude that is sitting in the tanks. I don't know yet what the average length of time a barrel of crude sits in the tank between delivery and being fed into the refinery but I imagine it would be short. The refiners shouldn't be worried about price spikes because they just pass the increases along to the end users.

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