Gas price too high, in relation to crude oil

[John Galt III]

I noticed that the last time gas prices went way up, in June, 2008, that crude was $150 a barrel, and gas was $4 a gallon. This time around, gas was already up to $4 a gallon when crude was only up to $112 a barrel, in May, 2011. I guess the oil and gas guys have found a way to get the gas prices up even higher than last time, in relation to the crude oil price, even though crude prices aren't as high. And no wailing and screaming from the public / media. Interesting.

 

[Midpack]

Gas peaked at about $4.30/gal or so in 2008 where I am. Today it's $3.69/gal here. It did get up to $4.00/gal here briefly a long time back but not as high as 2008 by any means, but haven't seen it that high in several months here. And where we are, there's a formulation premium all summer, typically lower in winter all else being equal. FWIW...

 

[FIRE'd@51]

I think gas prices are more closely linked to the price of Brent crude which is trading about $20 a barrel higher than WTC, which is currently about $86. I don't remember what the spread was back in 2008, but IIRC, it was much tighter. I'm sure the weak dollar is playing a large roll in the spread today.

 

[John Galt III]

There is an article on Yahoo Finance today about why gas prices aren't falling along with the price of crude. The article mentions Brent vs WTI, but doesn't really make any sense. I was glad to see there is plenty of reaction in the way of comments about the article, which at least lets me know I am not alone in noticing the lack of a drop in gas prices.

 

[Lakewood90712]

I think it is a case of " Keep the price up until they stop buying " , so gasoline inventory / demand ratio must be about normal for late summer.

 

[chinaco]

IMO - The lack of transparency is the root problem.

It either leads to the wrong conclusion (no price manipulation... just a misread on what is happening) or provides cover for manipulation.

Ever wonder why a group would fight transparency if the main result would be clearing up a misunderstanding about what is happening?

 

[JOHNNIE36]

In the modern world, gas price relative to crude never makes sense. It's all about the "future". The stock market people betting of the come probably determine the price more than any other factor.

 

[Aiming_4_55]

Agree with ya. By me it's $3.70 a gallon @ Sam's Club yesterday and $3.79 at public gas stations @ $85ish a barrel. I'll be using public transportation for the new work commute @ $1.90 a day, pre-taxed for the express bus.

I noticed that the last time gas prices went way up, in June, 2008, that crude was $150 a barrel, and gas was $4 a gallon. This time around, gas was already up to $4 a gallon when crude was only up to $112 a barrel, in May, 2011. I guess the oil and gas guys have found a way to get the gas prices up even higher than last time, in relation to the crude oil price, even though crude prices aren't as high. And no wailing and screaming from the public / media. Interesting.

 

[Mulligan]

Agree with ya. By me it's $3.70 a gallon @ Sam's Club yesterday and $3.79 at public gas stations @ $85ish a barrel. I'll be using public transportation for the new work commute @ $1.90 a day, pre-taxed for the express bus.

$3.70 a gallon? Wow, I guess I shouldn't complain about $3.30 a gallon gas we have in Missouri, now.

 

[Aiming_4_55]

$3.83 at BP coming home today, must be hitting those returning from a holiday roadtrip

We were in Branson, MO for July 4th week, it was about .40 - .50 cheaper per gallon.

Orlando was about 3.39 - $3.43 last week per gallon. I'm sure it's higher this week.

St Paul burb isn't as cheap as some think, I've found food and gas is comparable to the burb of Chicago in some respect.

$3.70 a gallon? Wow, I guess I shouldn't complain about $3.30 a gallon gas we have in Missouri, now.

 

[Badger]

So why is it that every year for the last few years the oil companies have been reporting record profits? Wait, wait, I think I know the answer but I didn't get my kiss first.

Cheers!

 

[FinanceDude]

When gas was $150 a barrel, our gas was $4.50. Now that gas is around $85 a barrel, our gas is $3.69. Gas should be around $2.55 or so a gallon.........

 

[rescueme]

When gas was $150 a barrel, our gas was $4.50. Now that gas is around $85 a barrel, our gas is $3.69. Gas should be around $2.55 or so a gallon.........

Don't forget that a 42-gal. barrel of crude only produces 19-21 gal. of refined gas, and you have to include storage, transport, marketing, taxes, profit, and other fees. Most of these costs remain the same, regardless if crude is currently expensive or cheap; they don't reflect the current price out of the ground, but are levied on each gal/barrel produced, delivered, and sold. I don't believe the various gas taxes levied on each gallon are reduced when oil gets cheaper ...

The rest of the barrel produces other petro products:

http://205.254.135.24/tools/faqs/faq.cfm?id=24&t=6

Are the companies making a profit? Sure (that's why they are on the top of our investment holdings - CVX/XOM). We invest in what we use (that's why J&J is another top holding of ours, along with various drug companies...)

 

[REWahoo]

Here's one explanation of why gas prices haven't come down:

If you’re expecting gasoline prices to soon reflect the 11% decline seen in New York-traded oil since the start of the summer-driving season, don’t hold your breath — because Brent crude prices have a bigger sway.

Lots of [-]excuses[/-] reasons cited in the article..
Consumers have Brent to blame for gasoline prices - Commodities Corner - MarketWatch

 

[Zathras]

It is interesting how some people would rather blame someone than do something to fix the issue.
That said, I am sure it is a combination of the factors already mentioned. In addition, I would add that when oil was $145/barrel a lot of losses were being taken (except for the oil suppliers that is). I suspect if they were running the same margins they are now, gas would have been more expensive back then.
It would be interesting to see what refinery and gas station margins are now compared to when oil was $145/barrel.

 

[Gumby]

The relevant statistic is called the Crack spread (really). It is a measure of how profitable the refineries are.


Here is the chart over the past year
Bloomberg Nymex WTI Cushing Crude Oil First Month 321 Crack Spread (CRK321M1:IND) Index Performance - Bloomberg

As you can see, the crack spread has been widening, so decreases in crude prices don't show up equally in gasoline prices.

 

[Pajaro]

Your question gives me more questions like:
If the St Paul market will bear $3.83 per gallon, shouldn't that be the price regardless of the price of crude?
Is the entire industry so regulated that we should expect Price_of_Crude x Authorized_Profit = Price_of_Gas?

Does the price of Pepsi fluctuate with the price of high fructose corn syrup? I really have no idea, but I know I spend more for a gallon of Pepsi than I do for a gallon of gas.

Can you think of another consumable in which we constantly analyze the price like we do with gas? If not, is it just because there is so much transparency in the price of the base material (unlike a car which has R&D costs and price fluctuations of many materials)?

 

[brewer12345]

New refineries are not being built in the US and have np been for a long time. The NIMBY effect plus high costs are at work. New refining capacity is being built mostly in Asia and the Middle East. This means supply lines to the US will be longer and gasoline and diesel will be priced on a more global scale. That means Brent crude and benchmarks in Asia and South America will become more important than Cushing oil.

If you Google the Navios Maritime Acquisition site and look at their latest investor presentation they show very concisely what is playing out in the next 5 years.

 

[ERD50]

Your question gives me more questions like:
If the St Paul market will bear $3.83 per gallon, shouldn't that be the price regardless of the price of crude?
Is the entire industry so regulated that we should expect Price_of_Crude x Authorized_Profit = Price_of_Gas?

That ignores the supply side of things. If a business cannot make a profit selling at $3.83, they will have to raise the price, and people will pay it because they need gasoline. $3.83 is on a curve, it is not a brick wall. But the higher the price, the more they will conserve.

Prices are affected by formulations (hi smog areas), distribution costs, and taxes also.

Does the price of Pepsi fluctuate with the price of high fructose corn syrup? I really have no idea, but I know I spend more for a gallon of Pepsi than I do for a gallon of gas.

I expect that the cost of HFCS is a very minor cost in a Pepsi. We could do the math, the sugar content is on the label, and the HFCS price is available.

Can you think of another consumable in which we constantly analyze the price like we do with gas? If not, is it just because there is so much transparency in the price of the base material (unlike a car which has R&D costs and price fluctuations of many materials)?

It is odd to me how people focus on gas price down to the penny, when that penny means about 14 cents to a fill up. I guess because the signs are all in our face, and so many of us buy it regularly? How many people could quote the price of their KWhr or Natural gas heat?


-ERD50

 

[Zathras]

New refineries are not being built in the US and have np been for a long time...

While this is my understanding as well, concluding that capacity has not increased since the 70s (since refineries have been built) would be incorrect. Refinery capacity of existing refineries has grown quite a bit in that same time.

 

[ziggy29]

It is odd to me how people focus on gas price down to the penny, when that penny means about 14 cents to a fill up. I guess because the signs are all in our face, and so many of us buy it regularly? How many people could quote the price of their KWhr or Natural gas heat?

People don't see huge signs reminding of them of the rapid changes in electric or natural gas prices when they drive around town. Out of sight, out of mind.

 

[brewer12345]

While this is my understanding as well, concluding that capacity has not increased since the 70s (since refineries have been built) would be incorrect. Refinery capacity of existing refineries has grown quite a bit in that same time.

Have a look at slides 21 and 22: http://phx.corporate-ir.net/Externa...9NDM5MzQwfENoaWxkSUQ9NDYwODE2fFR5cGU9MQ==&t=1

 

[rescueme]

People don't see huge signs reminding of them of the rapid changes in electric or natural gas prices when they drive around town. Out of sight, out of mind.

And some of us who drive very little and refuel infrequently (for me, once during the past month) a few - or more than a few cents mean little.

DW uses a bit more than gas than me and always comments on the current price (refuels every other week). My answer to her when she notes a few pennies of increase is simply "how many gallons did you refill?".

Usually, it's less than 10 gallons. Multiply 10 times whatever increase (normally in pennies) and see what the difference actually is. It means very little, in our simple life.

As for those that refill every few days? I can understand your concern (another plus for ER )...

 

[Gumby]

The relevant statistic is called the Crack spread (really). It is a measure of how profitable the refineries are.


Here is the chart over the past year
Bloomberg Nymex WTI Cushing Crude Oil First Month 321 Crack Spread (CRK321M1:IND) Index Performance - Bloomberg

As you can see, the crack spread has been widening, so decreases in crude prices don't show up equally in gasoline prices.

Here is another interesting chart that illustrates the point. If you look at the chart on Page 2 and compare the distance between the red crude oil curve and the blue gasoline curve, you can see that, while the prices generally tracked up and down, the distance between them expanded over the course of the past three years. This is what the crack spread measures.

http://www.api.org/aboutoilgas/gasoline/upload/PumpPriceUpdate.pdf

 

[REWahoo]

If you look at the chart on Page 2 and compare the distance between the red crude oil curve and the blue gasoline curve, you can see that, while the prices generally tracked up and down, the distance between them expanded over the course of the past three years. This is what the crack spread measures.

The chart is missing a key element: the relationship of the crack spread to the price of K-Y Jelly...