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Crude oil is getting cheaper -- so why isn't gas?
Old 02-16-2009, 02:45 PM   #1
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Crude oil is getting cheaper -- so why isn't gas?

I found this to be an interesting article:
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Old 02-16-2009, 03:49 PM   #2
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I have been watching the price of oil and gas for awhile now. It really irritated me when oil reached the low $30's per barrel recently and the price of gas only went down to $1.58. Previously, like two or three months earlier oil had reached the same price, but the price for gas was a mere $1.3? per gallon. I find it interesting that gas seems to have broke it's bond with the price of oil. I've seen this one other time in the last 3 or 4 years and that was right after Christmas when the price of oil dropped about $10, but gas stayed the same. After a few weeks the price of gas came down, quickly. Hopefully it does the same this time around. It doesn't make sense to me to continue using expensive imported oil, to make gas, when we seem to have an over abundance of better quality oil from West Texas.
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Old 02-16-2009, 04:08 PM   #3
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Actually, a couple months ago the price of gas crashed beyond where it normally would with oil down in the $30s and $40s, largely because there was a short-term glut of gasoline available because demand was destroyed so quickly in this economy. But once refining activity slowed down to the point where there wasn't an extreme imbalance in supply and demand any more, the price moved closer to the equilibrium point.

Plus, now we're to the time of year where it almost always starts to rise until early summer, so expect another 25 to 50 cents by Memorial Day.
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Old 02-16-2009, 04:10 PM   #4
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Because we willingly pay the current price for gas........
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Old 02-16-2009, 04:14 PM   #5
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There's a lot more at play here than just the cost of the crude.

Refiners got crushed on gasoline production when crude prices fell last year. They were selling gasoline at a discount to crude. No refiner wants to be on the wrong side of the crack spread and I'm sure that part of the reason gasoline prices fell more slowly than crude did was due to deliberate attempts by refiners to try not to lose too much money. I'm not sure if the same thing is currently working as crude continues to fall and gasoline goes up, but it would make sense.

Demand has dropped off drastically and they're probably not making as much as they used to. I read recently that US refiners have even started exporting gasoline again. Domestic gasoline inventories are down right now which seems to back the original theory that they're trying to stay profitable making a product that hasn't been very profitable lately. Scarcity generally raises prices, so you make less of it and up goes the price.

If it was all about WTI then my gasoline wouldn't cost $1.72 a gallon.

It used to be (four years ago or so) that $40 a barrel for crude was insanely high. Oil companies made money all day at those prices. But after the last few years of increasing demand and crude prices, followed by dramatic drops in both, have the refiners totally screwed up trying to figure out how to keep on making a profit.
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Old 02-16-2009, 04:17 PM   #6
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I'm looking forward to rarely using any gasoline in a few months.
However, also keep in mind that it takes some time to get the oil from the refiners to the gas stations. And if refineries are pumping out less supply, it will support higher prices.
Heck, I heard pick-up trucks were the biggest sellers in January. If people forget this quickly, I expect we will see $4 as soon as the recession is over (possibly pushing us into another one).
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Old 02-16-2009, 04:50 PM   #7
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I'm looking forward to rarely using any gasoline in a few months.
What happens in a few months? I thought you already had that plug-in mod done to your Prius?

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Old 02-16-2009, 04:56 PM   #8
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What I found interesting is that most of our gasoline is refined from overseas oil, not West Texas crude, and that this overseas oil is trading at prices some $10 a barrel higher than WTI. Evidently, we don't have the pipeline system to get the WTI to refineries nationwide, so these refineries have to use the currently more expensive overseas oil. The article goes on to say that those pipelines were never built because the overseas oil (of an inferior grade) has historically been cheaper than WTI.

I think this also explains why we are seeing a larger contango in the WTI futures than in the Brent futures.
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Old 02-16-2009, 05:16 PM   #9
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Originally Posted by FIRE'd@51 View Post
What I found interesting is that most of our gasoline is refined from overseas oil, not West Texas crude, and that this overseas oil is trading at prices some $10 a barrel higher than WTI. Evidently, we don't have the pipeline system to get the WTI to refineries nationwide, so these refineries have to use the currently more expensive overseas oil. The article goes on to say that those pipelines were never built because the overseas oil (of an inferior grade) has historically been cheaper than WTI.

I think this also explains why we are seeing a larger contango in the WTI futures than in the Brent futures.
WTI is basically oil in and around Tx and Ok. Brent is quoted frequently but that's basically northern Europe and East Coast. Many refineries are designed to run Canadian crudes or South American/Mexican heavy crudes. They can all run a mixture but their economics usually favor a certain mix of properties related to certain types of crudes. All of these crudes are priced differently so there's a constant economic optimization going on. Sometimes some crudes get really cheap but only a few refineries may be able to take advantage of it.
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Old 02-16-2009, 05:23 PM   #10
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What happens in a few months? I thought you already had that plug-in mod done to your Prius?

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Come June I should have my new all electric RAV4
The plug in still uses gasoline, just less of it.
But once I have the RAV4 ev, the only time we will need gasoline is when we need to take a long trip (at which time we will use the plug-in Prius).
Still hoping for a Volt type car which uses no gasoline the first X number of miles and then uses gasoline, but I don't know that the Volt will ever see the light of day now
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Old 02-16-2009, 05:38 PM   #11
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Yes I have been getting more and more mad as the price increases, and I only fill up once a month since I ERed. A few years back they eased us into higher prices, we became used to it. Now that the crude price is down they cut production to meet lower demand thus higher gas prices. Its the American way, lets see oil at 140 barrel, gas at about 4 bucks, now oil at about 40 gas just paid 1.91, something is fishey, getting screwed somehow.
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Old 02-16-2009, 06:40 PM   #12
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Fatter crack spreads, simple as that. Frankly, I'll happily pay $1.7X vs $4 and change, regardless of the price of crude.
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Old 02-16-2009, 08:26 PM   #13
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... lets see oil at 140 barrel, gas at about 4 bucks, now oil at about 40 gas just paid 1.91, something is fishey, getting screwed somehow.
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Actually, according to your math we are getting a great deal. Why are you complaining?

Crude makes up roughly half the cost of gasoline. So, a drop from 140 to 40 means crude dropped about 70% from the price it was. Since crude only makes up half the cost, gas should drop half of that, about 35%. So, gas should be ~ $2.60/gallon.

Seems you are getting quite a bargain. Who are you going to complain to?

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Old 02-16-2009, 08:41 PM   #14
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I read this article this morning in USA Today chalking it up to supply and demand (why refineries are holding down their supply in spite of the less expensive crude they can procure): Low oil prices are not translating into low gas prices - USATODAY.com

From the article:

Quote:
Don't worry yet about $4 gasoline. If high profit margins persist, refiners will ratchet up production, Day says. Kloza says gas prices likely will head toward $2.50 a gallon through March. But they'll soon stabilize and drift down again, Flynn says.
Naturally this increase in March and subsequent drifting down of prices coincide with our driving trip in March....
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