What makes up the price of gasoline?

[two4theroad]

I found this article written by AP and thought some might like to see it.

AP IMPACT: What makes up the price of gas?: Financial News - Yahoo! Finance


Excerpt from the article which sums it up.....

At the starting point of all this is the price of oil -- which, like the oil itself, is nothing if not crude.
The knee-jerk villains are the oil companies, fat with multibillion-dollar profits, frequent targets of populist anger. But wait: The oil companies don't set the price of oil or the cost of a gallon of gas.
Prices are a function of the open market, the result of futures contracts being traded on the New York Mercantile Exchange, or Nymex, and other exchanges around the world.
Buying the current July crude oil futures contract means you're buying oil that will be delivered by the end of July. But most investors who trade futures have no intention of ever accepting the underlying oil: Like stock investors who frequently buy and sell their holdings, they're simply betting that prices will rise or fall.
Of late, on the Nymex, oil futures have been rising.
Why? Blame the falling dollar. Oil is priced in U.S. dollars, and the weaker the dollar gets, the more attractive dollar-denominated oil contracts are to foreign investors -- or any investor looking for a safe haven in the turbulent stock market.
The rush of buyers keeps pushing oil futures to a series of new records, and the rest of the energy complex, including gasoline futures, has followed. That pushes up the price of gas that goes into your tank.
"Crude is the driver," said Jim Ritterbusch, president of energy consultancy Ritterbusch and Associates in Galena, Ill. "As long as it stays up there, gasoline's not going to be able to decline much at all, even if demand slips. That's just the way it is."


End Excerpt



So among other things, what they are saying is....WE, the investing public and our mutual funds, the ones who try to make a dollar and ten cents with our dollar, are part of the insanity.






2fer

[Ed_The_Gypsy]

Actually, it used to be that most of the price of a gallon of gasoline was taxes. At the time it was about $0.35-$0.50, if I recall correctly.

Quote:

So among other things, what they are saying is....WE, the investing public and our mutual funds, the ones who try to make a dollar and ten cents with our dollar, are part of the insanity.

And it is working out quite well for me, thank you very much. :-)

Actually, the observations are correct but the conclusion is kaka. Those who buy futures are making a bet and they CAN lose that bet.

Increasing world demand together with political instability in producing countries is causing the run-up in gasoline prices. It seems that the Chinese and the Indians (among others) want fancy cars, too. The nerve of them!

[Leonidas]

Quote:

Originally Posted by two4theroad So among other things, what they are saying is....WE, the investing public and our mutual funds, the ones who try to make a dollar and ten cents with our dollar, are part of the insanity.

There is no shortage of opinions about this topic in the media and on the editorial pages.

The one component of all of this that I can quantify is the weak dollar's effect. If the buying power of our dead presidents had not dropped so much in the last several years, a gallon of regular would only be about $2.75 before taxes.

Currency issues aside though, the price at the pump has more than doubled in the last 8 years.

There does not appear to be any shortage of crude oil to buy and refine. And everybody from the OPEC'ers to the CEO of Valero are all saying the same thing - there is plenty of crude to be bought. The most recent IAE figures show that they revised some numbers, and production is rebounding upward while demand is not growing as fast as they had previously believed. There is about 100,000 Bbls per day of crude in excess to demand.

The refiners, at least in the U.S., do not appear to be stretching themselves to produce product at the moment. And if there have been any shortages of gasoline anywhere in the world I haven't seen a report of it. The only time I ever have to wait in line to buy gas is because I am part of the herd of sheep that is flocking to the station that has the cheapest gas at the moment. The place across the street with higher prices is deserted. But when the refiners show up at the market to buy crude, even though they can find all they need, they have to pay more for it each time they go shopping.

Unless someone is sitting on a lot of crude in tanks somewhere (that has happened), the answer to the riddle has to be that speculation accounts for most of the price increase. Speculative demand is the same as real demand. Valero, the hedge funders, and the Nebraska State Teachers Retirement Fund are all elbow to elbow shouting "buy, buy, buy".

Demand and supply will rule in the long run, and the long-term picture does seem to be telling us that eventually there will be more demand than there is supply. God knows what the prices will go to if some day one of the prducers announces "Sorry, I'm out for today. Come back tomorrow". But that moment has not yet come. There is sufficient "tightness" in the market that the speculators are finding it profitable, for the moment. In the near term it could go either way, but I suspect that it has almost reached the point where some of these players have got to be close to thinking "I'm not a buyer at that price."

My crystal ball is as good as any, but I'm betting we see sub-$100 crude again.

[Texarkandy]

Good post there Leonidas - really puts it into perspective.

[two4theroad]

This statement was made with tongue firmly embedded in cheek.

"So among other things, what they are saying is....WE, the investing public and our mutual funds, the ones who try to make a dollar and ten cents with our dollar, are part of the insanity."


I do not know how to link to former posts so I will copy paste them.



I believe a large part of the pricing problems arise from futures traders, speculators and other price affecting entities who contribute NOTHING of value to the public good. There are many who believe that even allowing for the devaluation of the dollar that oil should only be about $80 per barrel. Someone is making loads of $$$ and delivering no value to the consumers. If anything that is what should be addressed by the government. These same types who manipulate markets for their own profit with no concern for the future repercussions to the public (like the credit mess we are all prisoner to now) are the ones that need to be regulated.
2fer
And don't get me started on ethanol.....




Don't Tell Anyone, the "Fix" is in...

The money coming out of the stock market is flowing to commodities, energy in particular. When the correction comes, many will lose their investments.
All that has to be done is persuade world wide investors and traders that peak oil is here, that China and India will buy up all the oil and if they will just get in the game now they too can make millions without lifting a finger I know for a fact that the storage tanks at the refineries where I live are full, ships are on their way with more oil and the refinery rates have been cut back to just stay ahead of delivery because they will not make product that costs more to make than they can sell it for.
Oil futures are cheaper each year for the next several according to the futures contracts, which usually means that there is massive speculation in the markets and when it ends the prices will fall.
Mind you, I do not believe we will see $50 oil again and it may go higher before it comes down again but the speed with which it went to $120 is just not justifiable at this time.

Leonidas, I agree with you completely. The price of oil will fall when the dollar recovers. And Ed, the rise in value of oil and refiner stocks allowed me to retire early so it is working quite well for me too.

2fer

[kcowan]

Quote:

Originally Posted by Leonidas My crystal ball is as good as any, but I'm betting we see sub-$100 crude again.

Wanna bet? you can make a lot of money if you are right...

[TromboneAl]

I want a pie chart.

[Midpack]

Quote:

Originally Posted by two4theroad The price of oil will fall when the dollar recovers.

Definitely true, but that's a double edged sword no? Exports are up 18% due to the weak dollar, wonder where our economy would be right now with much weaker exports? I hope I'm wrong, but I think our energy future is a much bigger issue than most people seem to realize. What comes around...

[retire@40]

What I am more curious about is what, if anything, is filling the void left after the millions of barrels are pumped out of the ground every day? Also, is the Earth getting lighter due to all the burning of all this oil?

[SteveR]

Quote:

Originally Posted by TromboneAl I want a pie chart.

Here you go.

[ladelfina]

[HA Ha ha!! Love the pie!]

[Ed_The_Gypsy]

Quote:

Unless someone is sitting on a lot of crude in tanks somewhere (that has happened)...

I doubt it. I remember when the gummint sent helicopters out to find tankers off-shore, just over the horizon. Weren't there.

It costs too much to store crude these days. Terminals where it would be stored have been closed down. Pump it and sell it. Any bozo in Big Oil who wanted to hang onto some in a tanker somewhere would be shot by his buddies.

You have no idea the pressure to build some of these idiotic oil sands designs ASAP.

Quote:

...the answer to the riddle has to be that speculation accounts for most of the price increase.

That may be. However, these speculators can lose their bets. I wouldn't put money on that table. Oil just went from about $132 to $127/bbl today. Somebody lost their shirt.

Cheers,

Ed the Gypsy,
Still taking a job away from a Canadian in the tar pits.

[Leonidas]

Quote:

Originally Posted by Ed_The_Gypsy I doubt it. I remember when the gummint sent helicopters out to find tankers off-shore, just over the horizon. Weren't there. It costs too much to store crude these days. Terminals where it would be stored have been closed down. Pump it and sell it. Any bozo in Big Oil who wanted to hang onto some in a tanker somewhere would be shot by his buddies.

My response was turning into something monstrous so I’m just going to write a summary.

I used to think the same as you, speculators would not take physical delivery of a commodity because they’re not in the business of turning pork bellies into bacon (mmmm, bacon), or oil into gasoline and heating oil. But oil doesn’t rot or spoil so it might make sense, if your future profit is higher than the storage costs.

So I went in search to see if I could find examples of speculators buying and storing oil and being profitable at it. I got to the concept of the Oil-Storage-Trade the long way around. I started by looking at oil storage in Singapore because when I commented that oil has been stockpiled in tanks I was remembering something I had read two years ago. The prices in Singapore were bottoming out because of excessive oil flooding the local market. At the same time the rest of the world was worried about supply and the price was going through the roof.

Quote:

The oil-storage trade is a trading strategy where oil tank owners and companies that lease storage buy oil for immediate delivery and stick it in their storage tanks, then sell contracts for future delivery at a higher price. When delivery dates approach, they close out existing contracts and sell new ones for future delivery of the same oil. The oil never moves out of storage. Trading in this fashion is only successful if the market is exhibiting contango, that is forward prices are higher than spot prices. Storing oil became big business recently, with many participants - including Wall Street giants such as Morgan Stanley - turning sizeable profits simply by sitting on tanks of oil.

I unraveled that ball of twine and worked my way backwards until I got to Morgan Stanley’s Capital Group and learned how they have been making money hand over fist by storing oil and distillates all over the world. They started by buying heating oil in the 1990’s and holding it in leased tanks in the Northeast. They moved on and by 2004 they had storage facilities leased all over the world. In 2006 they bought TLP which has over 20 million barrels of storage capacity in the U.S.

Investment banks are holding huge quantities of physical oil.

Increased storage capacity is being built all over the world, including the U.S. Singapore looks like it is about to become one huge tank farm with millions of bbls of capacity added in the last three-four years and more being built. What they don't stick in tanks above ground is going to go in caverns under the ground.

Everybody and his dog is getting into the oil game. Somebody needs to drive by the Nebraska State Teachers' Retirement System's offices and see if there aren't some tank trucks parked out back with "Pension Fund" painted on the side.

Oh, and the tankers? Iran, which was negotiating with China to store something like 100 million barrels of it's heavier crude, must be having a hard time finding tanks and/or refineries to take delivery (I guess China is full), because they have 28 million barrels sitting in tankers off Kharq Island. That probably has a lot to do with seasonal shutdowns of some refineries for maintenance, and Iran does have some nasty oil that only certain places are set up for, but still you have to wonder how much it costs to keep VLCC's tied up for weeks at a time. The Mullahs may be crazy but I don't think that makes the guys running the Iranian oil business stupid. Source: Business Intelligence Middle East - bi-me.com - Iran storing 28 million barrels of oil on ships - News, analysis, reports

So, the IAE says there is about 100,000 bbls a day of production that is in excess to consumption. If you think of that excess in terms of consumption, well, I will grant that it ain't squat. But we're talking about what's being bought and sold on the market each day, and then that 100,000 bbls looks kind of slim. When you have a lot of different players all running around buying a few thousand barrels here and there so they can stick it in their brand new tank farm, the excess to real consumption seems like it would easily be sucked up by speculative consumption. I don't know, because I can only guess at how much storage there is for speculative oil or how full it might be.

It does make me wonder what will happen next. Maybe the tanks will all fill up and the prices will waver a little and the speculators will start emptying the tanks because they don't want to be holding $100 oil that they paid $120 for. Or, maybe teachers in Nebraska will be retiring at 300% of their salaries with full COLA, free medical and a brand new Prius.

[Leonidas]

Oil rises despite falling demand - May. 28, 2008

Quote:

Oil fell nearly $3 earlier in the day, but rebounded after Morgan Stanley's co-head of global economics, Richard Berner, said crude prices could easily reach $150 a barrel this year, and that high prices will not be enough to curb demand in developing countries.

Knowing that Morgan is hanging on to millions of barrels of oil makes that statement seem sort of nefarious duplicitous.

Quote:

"It seems that these big banks are driving oil prices, where instead it used to be the other way around," said Alaron Trading senior market analyst Phil Flynn.

I guess if I were the suspicious and untrusting type, I could imagine a scenario in which someone over at the MS Capital Group freaked out a little when the black stuff slipped down a few bucks. My imagination would just run away with itself and dream up that someone made some calls to the penthouse suite. And before long the phone would ring in the MS Global Economics Offices, "Quick, Richard, go out there and say something that will make oil go back up!"

Ahh, that would be just silly.

[whitestick]

Sounds like a number of these folks studied at the knees of the Hunt Brothers and their attempt to control silver. Only now they are applying that concept to oil. From you analysis, if complete and true, it seems that a significant fall in the price of oil, is a matter of when, not if. Interesting times.

[Leonidas]

Quote:

Originally Posted by whitestick From you analysis, if complete and true

Complete, no. This "what should oil cost" thing has way too many components and way too much hidden information for me to be able to estimate how much of it I have seen. It's starting to feel like the situation where the five blind men all grab a different part of an elephant and then gave accurate descriptions of what they think the nature of an elephant is. They are each correct and truthful in what they think they the truth is, it's just that none of them have the whole picture, so to speak.

In the long-term, and I think well within my lifetime, $4 a gallon gas is going to be remembered fondly as being cheap. Of course I plan on living at least another 40 years, so there is a lot of play in that timeline. The laws of supply and demand cannot be denied over time.

In the short term I think that speculation has taken supply and demand and grossly exaggerated the effects of every minor change. Volatility is what fuels the market and makes money for the players who made the right bet. Of all the frothy activity in this market, I'm not sure how much is just the natural result from a lot of hogs rushing in to get fat, or how much is from different shades of manipulation, but I do think that in the short term that speculation has driven prices up past where they should be at this point.

Just to illustrate the zaniness of this market - while I've been writing this there has been a wild swing in crude prices. It started out down, then when they got numbers on inventories that were way off the estimates it skyrocketed to the upside, ten minutes later it's back in the red for some reason. I'm beginning to get that feeling like Eddie Murphy did in trading places "I can feel them out there, they're panicking".

I do have to admit that I'm losing my conviction on the sub-$100 oil. I completely forgot that hurricane season starts next week and the La Nina effect is weakening this year. If one half-ass hurricane even pretends to come close to the Gulf Coast and I think $100 oil is not going to happen, if at all, anytime before the end of the year. If a real hurricane hits the GOM then I wouldn't be surprised to see it hit $150.

[Leonidas]

The CFTC is investigating 60 different possible instances of manipulation in different commodities markets:

Quote:

The CFTC has expanded an investigation, disclosed previously by The Wall Street Journal, into alleged short-term manipulation of crude-oil prices via a widely used price-reporting system run by Platts, a unit of McGraw-Hill Cos. One suspicion is that energy companies and traders have at times issued a flood of orders during a time window used by Platts to determine its reported prices for physical oil transactions, then used the potentially distorted prices to make profits in other markets. Platts has said its system has safeguards to protect against manipulation. Subpoenas on the matter have gone out in several stages, people familiar with the cases say. The agency has also been questioning traders about similar activity in the jet-fuel market, people familiar with the matter say.

And they're also looking at storage tank operators who may have made false reports regarding how full their tanks are in order to trade on the market responding to misleading information. Free Preview - WSJ.com