(I lost track of this post which was originally written at the beginning of September. Thought it was kinda interesting in light of the current price of oil)
Would it surprise you to know, that refining capacity utilization has dropped since 2004? Would it also surprise you to know that idle refining capacity has INCREASED year over year? It has.
In other words, refiners (even those that have the capacity to produce more gasoline, aren’t producing more gasoline. Surely it must be a conspiracy, right? No. It is, however, a rather elegant proof that the price of crude for spot delivery has become completely disconnected from reality and is being driven by, wait for it, speculation.
Nominally, with oil at 140.00/bbl, you’d see unleaded close to $6/gal. It’s $4 and likely to remain there as long as oil is over $100/bbl because the refiners simply can not move the gas at more than $4. Even at this level, you’re seeing significant demand destruction from people changing habits. Give it another 6 months and you’ll see permanent destruction as new habits become the norm and effect of all those new small cars starts to be felt. You wanna see oil use drop 20% in a year? Just hang on.
There are a few notes of interest on this. First, this from Krugman. Normally, I love me some Paul but he’s just wrong. Yes, the models show that prices are not being driven by speculation because, nominally, you’d see supply increase. That will happen, but it takes longer to see it in a chart. Demand for oil though is, in the short term, relatively inelastic. However, even given it’s necessity to daily life, people are making do with less. So demand has gone down (albeit slightly) and supply has remained roughly constant… yet oil has tacked on an additional $25/bbl.
The second note… Katrina took offline a massive amount of refining capacity and crude production. That was the first reason for a spike in gas prices. We’ve never seen prices go back down even with capacity restored. Which means refiners are getting pinched between what they can sell and what they are paying for crude feedstock. That kind of margin compression leads me, again, to the inescapable conclusion that the spot market is suffering from a speculative bubble.
Finally, the most irritating defense of the ‘no-speculative-bubble’ crowd is that it assumes, based on immediate demand/supply information, that there is no bubble. Ask what factors originally increased the cost of the oil and you get a hodge podge of answer’s. One spike, from 70 to over 80 more than a year ago, was caused by something Bush said about Iran. It never went back down. Which means specious news is being used to drive the price, not to mention the weak dollar, to ever higher levels. Meanwhile, the fundamentals are seriously beginning to look like crap, even with artificial demand from speculators and the IB’s (some of whom are, if rumors are to be believed, stockpiling crude)
Personally, while I think there is a bubble, because of weakness in the dollar the lowest it will probably go is around $90. However, there are some very good biofuel alternatives that could easily, in 12-18 months, replace all the traditional petroleum we use. And they can be produced for around $30/bbl. Oh… and none of them involve corn or soybeans.
See why I think gas will be around $1.50/gal in the next five years?
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