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Pain in the Gas
Author: BobR    Date: 02/29/2012 13:51:20

We've all watched with helplessness as the prices at the gas pump keep creeping up. It seems unfathomable that 5 years ago, the price had just gone over $2.00/gal. Why are gas prices so high? Will they ever go back down again? Is there anything that a politician can do about it?

To hear the Republican presidential candidates tell it (particularly Newt Gingrich), they have the magic bullet for high gas prices, and if you just elect them, they will deliver $2.50/gal gas:
Newt Gingrich, struggling to regain momentum in the Republican presidential primary, is leading the way, promising to get prices down to $2.50 per gallon.

"I've developed a program for American energy so no future president will ever bow to a Saudi king again and so every American can look forward to $2.50 a gallon gasoline," Gingrich said during his self-introduction at Wednesday's CNN debate
What are the details of that program? They're pretty vague, but generally involve removing all restrictions on drilling in environmentally sensitive areas. These include areas in the west that contain shale oil. This is a similar grade of oil as what is coming from the tar sands in Canada.

So does supply and demand really determine gas prices? Yes and no. For crude oil, it is the perception of supply and demand. Crude oil is a commodity, and is traded like any other stock. If there is a potential threat to supply, traders will buy shares, driving the price up. If traders think the shares are over-priced, they'll start dumping them, driving the price down. It seems the most a president can do is prevent threats to supply, by oh... I don't know... NOT threatening war with Iran?

Even then, the profit motive for commodities traders trumps geopolitical concerns. Let's not forget the trader that purposely drove the price per barrel over $100 for the first time, simply for the bragging rights to say he did. That sort of irresponsible ego-driven action has real effects on us all.

But wouldn't removing the Middle East from the equation help? It might if all oil was created equal. Unfortunately, it is not. Oil comes in different grades, and the equipment required and costs involved in refining it differ. Most oil refineries here in the US are configured to refine "light sweet crude". The oil coming from the tar sands is not. It requires more specialized equipment and time to refine, which drives the price of the finished products (ie: gasoline) up.

But let's get back to supply and demand. Most new cars these days are getting much better gas mileage than their ancestors. This has driven the demand for gasoline down. One would think that would drive the price down as well. Not unlike the OPEC countries in the 70s, the oil companies have handled that by reducing production to meet the reduced demand, and thus keep prices from dropping. They are also closing refineries, including several that produce most of the gas used by the northeast part of the U.S.:
In recent years we lost refineries in Westville, NJ, and Yorktown, Va. A large refinery in southeastern Pennsylvania was shut down in December as was one in New Jersey. A third large Philadelphia refinery is up for sale and will be closed in July if no buyer can be found.

Last week we learned that what once was one of the largest refineries in the world (500,000 barrels a day [b/d]), located in the US Virgin Islands and which has been shipping about 200,000 b/d to the U.S.'s east coast will close next month. If you add up the rated capacities of refineries being closed you are looking at something approaching 1.5 million b/d, but as these refineries were not running at capacity or sending their entire product to the northeastern U.S., we are losing more on the order of 800,000 b/d of daily production. If this is not enough several European refineries, another source for gasoline in the U.S., have recently closed down or are up for sale.

Leaving out the 200,000 b/d of oil products that has been coming from the Virgin Islands, the three big Philadelphia area refineries were producing about 40 percent of the gasoline and 60 percent of the diesel being consumed in the northeast. Making up for a loss of this size is likely to take some doing. The EIA is already warning of higher prices in the area and the possibility of spot shortages as the logistics of keeping the northeast supplied with liquid fuels is becoming far more complicated.

Some of the loss in refining capacity can be made up by increasing production at the remaining refineries in the northeast, increasing the amount of ethanol in gasoline, or trying to push more oil through the pipelines from the Gulf Coast refineries. These pipelines, however, are already moving about 2.5 million b/d which is close to max capacity.

So I wonder how THIS fits into Newt's plan. Is he going to nationalize the refineries to force them to stay open? The laws of supply and demand only work for the consumer when there are alternative sources. Otherwise, the oil companies can turn down the spigot, and make the same profit either way. "Drill here, drill now" only works if there is a place to refine the oil, and the companies are willing to refine it.

This is the free market at work. I think I'd like to see more regulation, not less.

69 comments (Latest Comment: 03/01/2012 02:54:11 by TriSec)
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