Why has the price of gas gone up?

There is a pretty good piece on MSNBC that explains how gas prices are set. It is written in a "FAQ" format and does quite a good job of breaking this down for the layperson. I think some of the material may have actually creeped into a report on Friday's NBC Nightly News (link to netcast—not sure if it works).

Ultimately, the price of gas prices is set by the price of crude oil on the futures market, which (I believe) is out of the hands of grandstanding politicians. If this much gets through to the public, I'd say we've made progress. The problem however, is that, in the eyes of the public, we've just replace one mystery (gas prices), with another (crude oil prices).

The fact is that the futures markets is opaque. Sure, financial news services come up with narratives about why the futures do what they do, but they never really cite any evidence for them. Does anyone, even the wise readers of the The Oil Drum, really know the true reasons why crude oil prices are high? Is it because the supply of crude oil is diminishing? Anxiety over Iran and Nigeria? Mere speculation by investors? Chances are that it's all of these things. Investors do things for all kinds of reasons, and they certainly don't act as a monolithic block.

http://www.theoildrum.com/tag/gas_prices (this link will take you to all of our stories on gas prices which go in to a lot greater depth than this post...)

Update [2006-4-22 13:3:39 by Super G]: As pointed out in the comments, the switchover from MTBE to ethanol [as well as the annual transition from winter blend to summer blend] is also contributing to higher prices in the short-term.

Agreed, it's all of these things that serve as causes; that's the easy part.  The excruciatingly difficult part is getting some kind of objectively accurate handle on the relative contributions of each of these factors.  For that reason, I think it's extremely valuable to have oil industry insiders such as westexas, Robert Rapier, and Heading Out as regular contributors on this site.  Without them, we outsiders would be left to speculate about such things with a very flimsy basis in empirical facts.
Without them, we outsiders would be left to speculate about such things with a very flimsy basis in empirical facts.

Capitalism is based on speculation

Speculation is signaling that
is a problem in the oil market.

Wednesday last was the key.

Even at $70 the bbl, crude inventory
still dropped.

In Olden times circa March 2003,

supply would overwhelm the markets
at a certain price,  The markets
just had to discover what that price

Today, in Copper, as well as oil,
there is no price that will bring this supply to market.

It is time to remind everyone of my long standing prediction that there will be physical shortages of gasoline this driving season. Gas lines and closed gas stations.

The reason events are about to move fast regarding all petroleum supply is that the market will turn a potential geological-based peak oil scenario to a virtual cut off of supply. Extraction cannot keep going at some slowly reduced rate, mostly because the refining and marketing sectors cannot operate under negative-growth conditions very long. Enter petrocollapse and the unraveling of the global growth economy. Chaos and futile attempts at social control will only delay the time we all get together and resume growing food locally and meeting our other needs from our bioregions.

No more fruit from Chile or techno-toys from China.


The above from Jan Lundberg-yes the one from Lundberg Survey

The US Empire will go to war before
admitting that Supply can no longer meet demand.

The usual scapegoats are being trotted out.


Extraction cannot keep going at some slowly reduced rate, mostly because the refining and marketing sectors cannot operate under negative-growth conditions very long.

Why not? Oil will become more valuble as the supply shrinks, there will be plenty of recources to empty oil wells while unneded parts of the infrastructure defaults.

mcgowanjm said:
"Extraction cannot keep going at some slowly reduced rate, mostly because the refining and marketing sectors cannot operate under negative-growth conditions very long."

Why Not? I'm genuinely curious as to why you think this. Unfortunately its just one unsubstantiated assertion supported by another unsubstantiated assertion, and doesnt explain anything.

Why cannot refining and marketing operate under 'negative growth conditions' for very long? A recession (aka negative growth conditions) has never meant the end of things as far as I can remmember. How do you characterise ' not very long'?

COuld you flesh that that out as far an explanation, please.

Thank you for your reply.

First-What does "Negative Growth"(NG) mean?

It's a late 20th C term for "Contracting Economy"

Of course no one in the Main Stream Media
wants to say this, in fact will be carried off the
stage in a strait jacket before the term "Contracting
Economy " is uttered.

Second-Watch a financial channel or read the WSJ
and make a point of noting how many times you
see/hear the word "growth".

Third-My Point-for 100 years the US and World Economy
has been operating in the Age of Oil.

We only get growth from our growing use of oil.

No growth, then no investment, no investment, no returns.

In fact the only returns on investment will come from hoarding the commodity in question, hence Lundberg's


At the same time, dogmatic cornucopians (i.e., most everyone who is not Peak-Oil aware) stubbornly believe that it's ALL due to fears over Iran, refinery outages, etc., with even LESS basis in empirical fact than we have at our disposal.  Until TSHTF, I fear that the only approach with people like that will be to roll one's eyes and throw up one's hands.

I have a colleague at work who confidently predicted yesterday that Oil prices would spike to $80 per barrel, then come down soon.  His reasoning?  The inflated price is ALL due to an Iran-fear induced bubble.  Of course, he doesn't know what the hell he is talking about, but one doesn't want to be impolite....

I propose one modification to the above description:  gas prices are ultimately set by (a) the price of crude oil; (b) the cost of the refining processs; and (c) the throughput of refiners in processing crude oil to meet gasoline demand.

Item (c) is important.  There can be a decoupling between gas prices and oil if refineries cannot meet gasoline demand even if oil is available.

Item (c) is important.  There can be a decoupling between gas prices and oil if refineries cannot meet gasoline demand even if oil is available.

That is exactly correct. It would not surprise me to see oil and gasoline prices diverge, or at least change in the same direction, but by starkly different percentages. I know some people who are playing a spread between the two in the futures markets with this expectation (and have been making good money so far).


The full breakdown from the article is:
  • 47%: Cost of crude
  • 23%: Federal, state, and local taxes
  • 18%: Refining costs and profits
  • 12%: Distribution and marketing, retail dealer profits
Indeed, the increase in crude prices may be obscuring more subtle things that are going on in the background.
One note, these figures are based on 2004 prices.
Ultimately, the price of gas prices is set by the price of crude oil on the futures market,

If true, then it is well within the reach of grandstanding politicians.  After all, this says that the price of gas selling now has little to do with how much it actually cost to produce it.  You've just used fancy words for what is price gouging to the public.

I wrote an essay on gasoling pricing last month:

A Primer on Gasoline Pricing

That article probably has gotten more hits than anything else I have written. Nobody who responded in the comments disputed my arguments. It is very similar to the MSNBC piece (which everyone should read), but not as comprehensive.

In short, gasoline prices right now are being affected by falling inventories. Oil prices, which of course affect gas prices as well, are being affected by tightness in supply and demand, fear, and speculation. But brimming crude oil inventories suggest that the forces affecting oil prices are not exactly the same as the forces affecting gasoline prices. If we see oil inventories fall dramatically for 7 weeks in a row, and much more steeply than forecast, then we will have $100 oil in 7 weeks.


rr...you're being too modest..i found your piece, mentioned above, as being much more informative than the msnbc article..well done.
Wait a second.  December oil futures are trading at $77.14.  Each blue barrel contains ~35 gallons of gasoline at most, by your estimation.  I realize it's not all going to gasoline then, but the price for that portion of the barrel shouldn't change.

December gasoline futures are trading at $1.95.  35 * $1.95 = $68.25 with zilch processing, refining, or transport costs.

What gives?

Responding to your elaborations on an earlier post, you wouldn't surprised to see them diverge, but I can't imagine how they can diverge with the price of gasoline being markedly less than the price of the oil that goes into it.

Really enjoy your expertise and excellent write-up, by the way.

Not 35 gallons of gasoline, but 35 gallons of fuels (plus heating oil). The gasoline yield is quite a bit less than 35 gallons.


Then it's even more inexplicable, which I'm sussing out might just be your point.  Baffling.

I think you might be confusing yourself by pricing out the yields in this way.

If you look at figures 1 (page 7) and 6 (page 9) in this document you can see how the gross refining margins for WTS (West Texas Sour) and Mexican Maya were calculated in August 2004.

What you need to do is to take a barrel of oil and look at all the stuff that is made from it: gasoline, diesel, heating oil, jet fuel, LPG, asphalt, etc. All of these have commercial value. Then you need to calculate the fraction that is the value of the gasoline over the total commercial value of all of these products. This is the part of the value of the crude oil that goes into just gasoline. (This is the step you are skipping - you are assuming that all of the value of an oil barrel goes into gasoline, forgetting about the value of other products.)

Multiply this fraction by the cost of a barrel of oil and that will give you the portion of the cost that corresponds to gasoline. Then divide that by the number of gallons of gasoline you get from the barrel to get the price per gallon of gasoline due just to the cost of crude.

Some information from the local paper/dpa, reposted on this thread -

According to Barbara Meyer-Bukow of the Mineralölwirtschaftsverband (MWV - call it the oil sellers in short), consumption fell more than expected last year. Gasoline sales (Benzinabsatz - a bit tricky, but in this case, I would bet on them measuring sales in liters, not euros) fell 6.3% in the first quarter. And according to the article (without quoting sourcing), German refineries were more than 99% utilized (ausgelastet), and posted good/excellent earnings.


From another poster, alistairC (http://www.theoildrum.com/user/alistairC) -

OK so I've looked up some numbers for France:

Overall cost of energy increased 35% in 2005
Consumption of "essence" (=gasoline = benzin) down 6%
Consumption of diesel up 0.9%
Biofuels up 18% (off a very low base)
3% decline in private vehicle kilometers
1% decline in overall vehicle fuel sales


What is interesting is to see how flexible German and French  gasoline sales seem to be in comparison to what one reads coming form the U.S. Even more interesting, if German sales actually declined 6.3%, and German refineries are essentially running non-stop, I would guess that Germany / Europe is currently able to deal with rising crude costs a touch better, as they then turn around and sell the U.S. higher valued products, thus earning a small 'discount' in their total energy bills.

In my opinion, peak is here, and America seems to be about at the level of preparation which one would expect from a society which seems to be ruled by the idea that the market (or prayer) is the most powerful force in human affairs. How much have gasoline sales in terms of volume declined due to higher prices there? Of course, you can also see Jevon's paradox at work in the real world - conceptually, all of the 'excess' German gasoline / French was consumed by others who could pay for it.

But then, can the U.S. really afford to pay? At least in Germany and France, the price is too high, and people shift their behavior. Gas prices are not an obsession in conversation here, though the basic opinion at where I work is that the prices rises are essentially due to gouging, and American ineptness and stupidity in the Middle East.

It's often said that there is no one to blame for the current spike in gasoline prices, except the public itself for not having the foresight to buy more fuel-efficient cars. This is not true. We can blame the government.

The particular problem we face today is a shortage of ethanol. The reason this additive is needed is because of government regulations. The problem is that the switchover to ethanol was mandated before the production capacity was in place to meet the required demand.

This could have and should have been anticipated. It is no secret how much gasoline would be produced this month. It is no secret how much ethanol would be available. A shortage of ethanol was perfectly predictable (and was, in fact, predicted by many observers). The consequences are equally predictable and we are facing them today: spot shortages and extremely high prices. Gas hit over $4/gallon in my town today for full-service premium.

Government regulation is responsible for this problem and government could have prevented it. They should have phased in the rollover to ethanol over a longer period to make sure that production capacity would be in place. By mandating a sudden transition, government set us up for the situation we are in today.

Of course the last thing they want is to be held responsible, which is why we see all this posturing about profiteering and Chinese demand. Yes, high worldwide demand is an issue and would flow into high gasoline prices eventually. But the sudden and immediate problem we are facing today is due to government regulation. This is one cace where the finger of blame is very easy to point. Government should be held accountable for this fiasco.

Sure, the government made a mistake with Ethanol but I don't believe you can land all the blame on them. The whole pricing problem is so incredibly complex that probably most of the people in government handling it haven't got much of a clue.

The consumers are responsible in part for their lifestyle choices. Sure, the system makes is hard to live any other way but we are still responsible for our choice.

There should be plenty of unmixed gasolene in US storage if ethanol avalability is the bottleneck.
Are you sugggesting that the rollover from MTBE to ethanol was introduced overnight? I have a very hard time believing that the government can pass any law that makes such an impact as this one without significant consultation and communication with affected industries. Blaming the government is always tempting but here it is no more legitimate that blaming any other segment of the energy supply industry.
Dinaz is right. The free marketeers see the world only through their filters which state simplistically that all intervention is bad, all events that are bad are the result of government interference, and that private industry can never fail.

All hail Enron.

The sad truth is the government is often far, far more efficient that the market. If the goal is a stable society and not the enrichment of a few greedheads, then the government wins hands down. If your plan is to impoverish everyone and enrich a handful, then go with the market. This is not some sort of secret that either side is witholding from the rest of us.

All hail the no-bid contract.

Like the immigration issue. To stop illegal immigration, put the CEOs, human resources people, and stock holders in jail for three years with no parole and guess what? Problem solved. Why hasn't this simple solution been done? Business interests like cheap labor. It busts unions. It makes the rich richer. It drags down salaries across the board. It makes the rich richer. Do they care if the poor get poorer? No. The poor are less than human to them. So they kill the government, formerly the only real alternative the people had to prevent the creation of an unassailable upper-class.

All hail millionaire Senators.

The ethanol thing is a scapegoat.  My support (I won'd say "proof" because that is presumptious) is that Canadian gas prices, without the MTBE/Ethanol transition, are spiking as well.
I would say that ethanol is catching blame in cases where it is blameless. The ethanol logistical/supply issue is only relevant in reformulated gasoline markets (and in states where it is mandated, but these are usually high ethanol producing states). Most areas of the country do not require ethanol in their gasoline (yet).


The transition does seem to have produced regional shortages.  If the transition was not "feathered in" one state at a time, then it obviously should have been (or feathered more slowly).

That said, it just seems laughable that as oil reaches $75/bbl, people are out there thinking of another reason for gasoline to be expensive.

No one has mentioned the weakness of the US dollar. You guys are all pretty sharp but it appears that being based in the USA causes one to think of the dollar as a constant (and therefore makes it easier for the Fed to inflate the currency). Oil prices are going up in US dollars partially because the US dollar is weakening. The Canadian dollar is up 43% vs the US since 2002 and it is not the only currency exhibiting this relative strength. Eventually the yuan will be revalued upwards greatly without affecting the Chinese trade surplus with the USA.  
Concur odograph.  Why is there any question as to why gas (essence/benzin/petrol) prices are high?

What concerns me is that there is much media focus on the complexities of regional fuel formulation.  This attention often carries a strong but unspoken suggestion that these complexities contribute to increasing the cost of motor fuel, which I'm sure it does.  Nonetheless, these formulations are intended to minimise health and environmental damage (the details are not familiar to me).  

I smell something bad cooking here.

How long until we hear a loudmouth pundit linking high gas costs to the "bureaucRATic" regulations on gasoline formulation?  (note that this is a very US-centric post) How long until this becomes the reason of the day that gas prices are so high?  How long then until a bill  is buried in an invincible antiterrorism initiative repealing a large portion of gasoline formulation rules?

All in the name of cheaper gas.  What politician wouldn't want to get behind that?

Do I sound paranoid?

If an ethanol shortage was to blame for high gas prices I would expect ethanol blended gasoline to be more expensive than the unblended gasoline. The reverse is still the case at my local station, ethanol blended is 10c/gal cheaper.
The ethanol factor has its share to do with the gas prices. I welcome it with open arms, not becuse ETOH is so good as a fuel (poor ERoEI) but makers of high fructose corn syrup will prefer to sell it to ETOH brewers instead of food makers. Better to put the sugar into cars to burn it off instead of people to make them fatter. What I'd like to see is the government buy the Splenda patent for a gigabuck then release it as a public domain invention so food companies can use Splenda in everything where sugar is used now. At least food wouldn't have so many calories that a goose could pull a Steve Fossett on a stomachful. (fly around the world non-stop)

High gas prices? BRING IT ON.

Some interesting comments from Joe Public over at CNN.  If these are the reactions to this slight uptick in prices, what will the reactions be to bigger peak oil changes...


People where is the &%&% outrage! Now I could see if our soldiers were over dying in the Middle East and we were getting gas for a 1.20 a galloon, but our boys are dying and we're still paying 3.00 a gallon. I got a gallon of water (which could sustain life for a week) for .69 and spent almost five times that for a galloon of fuel!!/

This was the comment on the CNN site that chilled me the most.  Could there be any clearer statement of what the war in Iraq was all about? And it's unfathomable to me that anyone would see all the death in Iraq as "worth it" for cheap gasoline.

And if you interviewed this guy about the invasion of Iraq, he would probably say he supported it because it spread freedom and democracy.
Mind-blowing. For a $1.20/gal they can go die in Iraq. And the guy thinks it's an outrage that gas costs more than water!
Come to think of it . . . this is demented enough that I could entertain the idea that it's satire.
sadly, if it was satire, it would have been an actor that said it, for it sure looked real.
What's up is anyone's guess, so I'll gladly take a guess. My guess is that we are closing in on the oil peak and extraction is leveling out while demand is still climbing. Since oil demand is seriously inelastic, the slightest shortfall will cause prices to skyrocket as shown.

The reason why demand is so damn inelastic is becuse oil is so necessary for our economic system, from aviation to commuting to pharmiceuticals to seemingly cubic zirconium production. Oil is needed EVERYWHERE in our economy. Without oil, we would still be in the trees swinging around like fur-free apes. (once we lose resources needed for clothing, we will re-evolve to have fur again!)

"once we lose resources needed for clothing, we will re-evolve to have fur again!"

I would say that you get the ultimate doomer award.  I have heard people speculate that we may regress back to an 19th century lifestyle, but I haven't heard anyone speculate that we would regress back to Australopithecus's

and in any case, can you imagine the length of time it would take even for even runaway selection to pick furry males and females and actually significantly change the phenotype %s? It will also occur in a likely time of global warming. A panting mechanism would be more likely to evolve..
Discover has a fascinating article in the latest issue that argues that Homo sapiens evolved to run.  Though the average American couch potato doesn't know it, humans can outrun down just about any other animal on earth.  Not in speed, but in endurance.  We are built to run long distances.  Supposedly, this explains everything from our prominant butts to our lack of hair.  Our sweating mechanism is a much more efficient way of dissipating heat than the panting method other mammals use.
Somewhere in the massive pile of paper that still occupies so much of my house is an old article that argues that our sweating mechanism probably had as much to do with our success on the African plains as our opposable thumb. When I was a kid in a Great Plains state, the history unit on the local Indian tribes described how two hunters in good shape could run down a deer in ten-twelve hours. Same technique worked for horses (who also sweat, but have a low-grade diet that requires steady browsing and lots of water, which the long chase denies to them).
One other thing that affects the price of gas, ironically considering just how much grandstanding politicians have been doing lately, are state and federal taxes. The federal government collects $0.184/gallon, which means they pulled in around $25 billion last year in the U.S. That is far more than any oil company made on U.S. sales. Add in an average state tax of $0.22/gallon, and you have another $30 billion going into state coffers.

So, when political panderers start to complain about price gouging, perhaps they should have it pointed out that they are the biggest "gougers" of all.


To be fair, though, insofar as these taxes are used to fund the building of public roads, highways, bridges, tunnels, and interstates, the gas tax seems like a very fair thing to levy.  In fact, I think that every penny of road construction should be paid for in this way.  And then there should probably be additional taxes to pay for other, hidden expenses imposed on the rest of society by roads and cars.

Of course, I have no idea of the extent to which things work this way in practice....

rr...perhaps your figures are off by a decimal point....but if the gov'mint only took in $25 billion in taxes, they would be pikers next to exxon's $326 billion in sales and $36 billion in profits last year. not that i'm disparaging free enterprise, mind you.
Gasoline sales around 135 billion gallons a year. So, 18.4 cents on the gallon gives $25 billion to the federal government. That's just like profit for them.

But, it isn't the taxes I am complaining about. It is the hypocrisy. I personally don't think gas taxes are high enough, and that's why we are not in as good a position as Europe as prices escalate higher.


Oh, the other point I meant to clarify is that the bulk of XOMs sales were overseas. So, when I say the federal and state governments profited the most in the U.S., that's what I mean. XOMs U.S. profit wasn't near $37 billion.

Incidentally, some oil companies release first quarter profits this week. Should be fun.


i would certainly agree with you that a gas tax would create a "better appreciation" for the true value of oil...however i couldn't trust this gov'mint to actually use the tax to feed alternative sources or mass transit or education or anything that you could imagine that would help us find our way through this wilderness. in fact , the u.s. federales are only interested in funding war and homeland security. all other branches are being gutted. i think that higher gas prices will bring about the same changes as you would hope a gas tax will..in fact, it is a gas tax...so just sit back and watch the opera unfold.
to those interested in where reformulated gasoline is required, i found this map on exxon's website
Thanks for that. This is going straight into my files. That should explain why Californians pay higher gasoline prices than average.


At least regarding the six counties around Denver... at some historical point, the ozone and carbon monoxide levels in the winter were so high on the bad days that something had to be done. The combination of high altitude and inflexibility of carburetors produced a problem. Contemporary electronic fuel injection and oxygen sensor systems that provide much finer control over the mix in the combustion chamber are a better solution than oxygenated fuel, and the authorities are starting to debate whether dropping the requirement for a high-oxygen additive is appropriate.

OTOH, at least two new ethanol plants are being built in the state, so there's some chance that we'll get a state-wide requirement rather than relaxing the current local one.

Ran some errands today and checked a few gas stations.  The Mobil across the street, which used to be the most expensive, was the cheapest at $2.98.   (It's been going up and down every day.)  The Getty station I usually go to, which used to be the cheapest place in town, was $3.12.  Another Mobil station I passed was charging $3.06.

I guess I am going to have to start going to the gas station across the street.

Gas prices are changing my behavior.  I had a lot of stuff to do, and it was pouring rain.  Ordinarily I would have just gone grocery shopping and done the other stuff another day, but I did everything this morning, to save on gas.  Even though the farthest I went from home was three miles, I didn't want to drive it twice if I didn't have to.  

Though running all my errands at once caused problems of its own.  I'm still not used to how small my new car is, and ended up with stuff on the back and front seat as well as in the trunk.  And the poor little Corolla was definitely straining under load.

From Clanton, Alabama:

Fears of gas shortage lining many pockets

Hitching a 2-percent price increase in 12 hours to "fear of a supply disruption" is as preposterous as it is asinine.

If the disruption doesn't happen, will prices reduce to compensate for the overcharge? We doubt it.

Truth is, come June 1 the gas corporations have a ready made excuse waiting for them - the beginning of Hurricane season. They're just riding the threat of an impending disruption of service for six weeks until they can find a better excuse to gouge us.

The one explanation for high crude prices that I haven't heard anyone use is:

Governments may be stockpiling covertly, ready for the coming war

any thoughts??

agreed...any production that is not refined is probably going into everyone's SPR...who wouldn't?
Rising gas prices have heavy impact on poor

The effect of rising gasoline prices shouldn't be viewed in isolation, said Carol Clements, chair of the National Fuels Fund Network, which provides emergency financial assistance to poor families that cannot pay their electricity or home-heating bills. "All of these energy costs are having a compounding effect," she said. "We're seeing more people bumped from middle and working class to low-income and poverty situations."

Corporate America has noticed, and is responding:

Wal-Mart Stores Inc., the nation's largest retailer, warned earlier this week that it expected reduced sales throughout 2006 from its least wealthy customers, and the company highlighted its strategy to market more higher-end goods to maintain growth. And after reporting a $92 million first-quarter loss, AMR Corp.'s American Airlines, the country's largest carrier, said it would mothball 27 of its most inefficient aircraft.
The free market argument used to be that these huge windfall profits were good because the oil companies would reinvest them into exploration and development.  This in turn would lead to increased supply.  We are seeing the end game now. $400 million golden parachutes.
An article from Australia about how high gas prices are affecting businesses:

The big squeeze

Back in 2001 when petrol was 80¢ a litre, it made sense for Hills Industries to consolidate its water tank production in one large factory and ship the containers around the country. But soaring transport bills have compelled the Adelaide-based electronics and household goods group to build satellite factories in different states to cut costs.

"You wouldn't have to be a genius to work out the distribution costs for shipping water tanks around Australia. It was going to kill us," said David Simmons, Hills chief executive.

"So we are going to get closer to the market, with satellite tank plants in Queensland, NSW and Victoria. The whole trucking industry has applied an oil-price surcharge because no one knows whether it is permanent or a blip."

Many smaller producers lack the scale to make similar savings, and instead have to either absorb costs or lift prices.

In Melbourne, 18-month-old business Emma And Tom's, which produces boutique bottled juices, is hit on almost every level by higher oil prices.

"The price of fruit has risen, as their freight costs have gone up," said director Emma Welsh. "Then our freight costs go up and then there's our sales reps and all their petrol costs.

"The cost of plastic bottles has also grown, but that's been outweighed by a growth in sales ... every time you turn around your suppliers' fuel levies go up."

So, how do you interpret this?

Chevron and Kuwait join line of European refineries up for sale

Nerefco is one of Europe's largest and most modern plants, with the capacity to process 400,000 barrels of crude oil per day, and Chevron's stake is expected to be worth more than $650m. The Europoort refinery is far smaller, processing 40,000 barrels per day, and will be worth closer to $320m.

A banker said: "Refineries are going for pretty ridiculous numbers at the moment. It's been an industry that's been very static in Europe."

Is it because:

a) Refinery prices are very high, and new refining capacity will eventually reduce profitability and hence prices.


b) There won't be enough oil to process in a few years, so sell now.

Yesterday the Energy Bulletin published an excellent article from The International Economy written by Philip Verleger titled, "Hundred dollar oil, five percent inflation, and the coming recession,"  www.pkverlegerllc.com/TIE_W06_Verleger.pdf

I'm surprised I haven't seen anyone comment on it yet (sorry if someone has) because it is very supportive of RR's thesis that the current gas price increase is due to refining capacity issues, not a peak in global oil production.  In fact, Verleger argues that high gasoline prices in North America will cause $100/barrel oil prices, not the other way around.  He argues that refining constraints come from three sources:  long term lack of investment in the US industry coupled with rising fuel standards that block foreign producers from selling into our market, delayed effects of hurricanes Katrina and Rita in which much routine maintenance was delayed until this Spring and because 5% of our refining capacity still hasn't been returned to service, and trouble meeting new low sulfur diesel and no MTBE rules.  Verleger is looking awfully prophetic given that his article appears to have been written before the start of this year.

I skimmed the article this morning and didn't see a direct mention of peak oil, or the shift in supply from light sweet crude to heavy sour curde, supply risk due to geopolitical instability etc.  So if Verleger is largely correct in his thinking we should consider the current run up in gasoline prices, higher inflation and the associated risk of recession a dry run for the real thing when more severe bottlenecks come to the fore.

Could crude, priced in US dollars, be so "high" because the US dollar is a completely devalued piece of worthless paper? Since 1913 the "Fed" has expanded the money supply so much faster than goods and services it has caused a 1000%+ inflation leading to a 95% destruction in the purchasing power of the US dollar.  Toss in the "peak fear" and you have yourself $75 dollar oil, even though current inventories appear ample.  Of course that inflation is nothing more than a deliberate hidden tax that confiscates the wealth of the citizens...


From the mouth of the sell-out himself;

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.
This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the "hidden" confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard."
~Alan Greenspan - 1967 "Capitalism, the Unknown Ideal"

Hello AngryChimp,

Excellent Post!  I think most of us are totally unaware how precarious the American Greenback is with all the debt in all segments of our society.  Greenspan could have done something years ago by jawboning against the various Presidents, but I think he was made an offer too good to refuse: the postPeak result will be very sad IMHO.

Bob Shaw in Phx,AZ  Are Humans Smarter than Yeast?

CNN has been doing blanket coverage of the high gas prices (and airing "We Were Warned" again tonight).

They just did a segment about New Yorkers who drive for miles out of their way to buy cheaper gas in New Jersey.  

Wholesale vs. Retail Gasoline

This chart is the first of two I finished about a week ago. I'll post the second in a while, after I update it. The two are the same, but I change the focus in the second and need to  remove some lines, so it is important to understand the first.

The spikey lines, red at the top and blue at the bottom are the weekly average retail and wholesale gasoline prices in the United States since January 2005.

What I am ultimately trying to do is to see what the normal correlation between these two prices is and then look for discrepancies.

The smoothed pink and purple lines running through the red and blue are trailing 4-week averages. I then shifted the purple line one week forward. I did this because I wanted to be comparing wholesale prices to their retail counterparts "next" week, allowing for any lag.

Lastly, I wanted to place these two lines on top of each other. I did this by finding the average price difference between January and August. This number started as about 65 cents, but moved to 68 cents when the EIA revised their numbers. I then added 68 cents to the purple line, raising it to become what I believe is another shade of blue.

I have then highlighted the gap in between these two lines in yellow where it was greater than normal. Please excuse the quality of the image, the yellow didn't work out the way I was hoping.

If you do the math on those yellow areas that is where you will find any excess profits at the retail level if any exist.

Question:  What's driving up the price of oil?

Answer:  Speculation.  The hedge funds and the Jimmy Rogers of the world have discovered that the Murkan way of life is truly non-negotiable.  Murkans are willing to pay any amount of money to fill their gas tanks.  Great!  Speculators buy more calls and bid the price up even higher.

This isn't terribly complicated to understand.  When speculators find anything, gold, copper, oil or whatever, that can be bid up without causing demand to fall or supply to increase, they buy it and drive the price up.  That's what speculators do.

Is it gouging?  You bet!  But the usual suspects, the oil companies, aren't the villains.  At least not directly though I'd expect they have people in their financial units engaged in buying up speculative oil contracts.

Right now speculators are betting that demand for oil is going to outstrip supply at the current price.  This has nothing to do with the "peak-oil" meme.  They don't care about buzzwords.  They care about what price the market will bear for a given commodity.  Right now they are essentially arbitraging what they see as a discrepancy between the current price of oil and its true value.  True value in this case represents what the Murkan motorist will pay.

Oil went from $3 a barrel in 1969 to $30 a barrel in 1980.  The economy survived with a few bumps and grinds along the way.  I think cool-headed speculators are now thinking $150 a barrel oil is not far-fetched based on what the economy has already survived.

What's the endgame?  Recession of course.  That's painfully obvious.  Until then speculators will continue buying calls on future supplies to force the price ever higher.  The leverage is immense and the profits are astronomical.  It's pretty clear there aren't any significant new sources to be brought online quickly at a given price point.  It's also pretty clear that the exurban commuters can't make a quick transition to car-pooling.

A recession may or may not be a bad thing.  Recessions are nasty but something has to give us smackdown or we're really screwed.  In a way it's the free market method of raising taxes on oil.  I'd rather see Jimmy Rogers get the money than BushCo.  Not that either will use that money to steer us in a better direction.

Right now the free market force of speculation is forcing the Murkan drivers to change their ways or go broke.  I'd bet on the latter.

The market-hating, bureaucracy loving, dumbocrats have found their wedge issue.  By punishing the oil companies they will accomplish the worst of all worlds - not untypically.

There are some very good observations here. I tend to agree with most if not all of it. At first I was going to object to your use of terminology in the last sentence, but then saw an earlier post and realized you don't like republicans either.
Neither party is prepared to engage in an intelligent, productive discourse.  Should they, who would listen?  Not Heidi Hummer or Dickie Dodge.  The Democrats can play this one to the hilt and, given the comments of Nancy Pelosi and Chuck Shumer, the game is on.  This hits Bush and Cheney where they live - the oil patch.  And we all love to hate the oil companies.  Not unlike a heroin addict feels toward his pushers.  The "big oil" issue can convince many of the populist branch of the Republican party to vote Democrat come November.
I agree with your conclusion, but I must quibble a bit about how speculators are most likely thinking at this point. Rather than looking at fundamental issues of supply and demand, I think (following John Maynard Keynes, as I so often do) that what speculators are trying to figure out is what the EXPECTATIONS of other speculators are--rather than fundamental supply and demand for actual commodities.

Thus, the way I see speculation is not so much as a variety of economics--because it is a stretch to say what we observe fits into mainstream economic theory and modeling based on perfect information and perfect rationality. Rather, I think the essence of speculation is to be found in collective behavior, which is a branch of social psychology that works on premises entirely different from those of economics. For example, the infamous tulip bulb mania had little to do with fundamental issues of supply and demand for tulips, and the dotcom mania of the late nineties had little to do with the actual supply and demand for dotcom services--but everything to do with rumor, self-reinforcing herd behavior, self-esteem, wishful thinking, etc.

If it were true that speculation was based on economic realities, then there would be reasonable limits to speculation (as there are in conventional economic theory). However, my observation leads me to the conclusion that periodically, speculators go nuts.

Oil CEO: As an independent who often votes democratic, I think LJR is spot-on with his analysis.  The liberals are going after this issue.  It's demagoguery but after years of republican demagoguery the democrats are going to play loose with the facts for political gain.  The republicans lied about wmd, the costs of the medicare program, and the impact of the tax cuts on deficits. Now the democrats have their issue.  This is the way democracy works (or doesn't)--always has as far as I can tell.

Regarding  LJR's analysis: I agree with him.  This is the market operating as it should.  The evidence points towards tight supplies.  Supply is currently meeting demand--we've not seen an oil shock, we've not seen enormous shortages anywhere, so one could  question the run-up in oil prices, except: speculators are betting that there is no future gusher coming online to undercut the prices everyone is paying.

One can interpret this as a discovery mechanism.  What price will the market bear?  If the Saudis had additional capacity available, they could destroy these speculators with the turn of a spigot (plus a few other details, like some additional tankers). They apparently can't.

The speculators don't see that additional capacity.  Neither do I.  So they are incrementally pulling up the price of oil. But let's not blame speculators.  It's also the users of oil, those who are purchasing contracts at current prices.

Though I have no expertise nor evidence to indicate as such, I'd bet that the speculators simply lead the market, in many cases to a new price point that is "correct", in other cases off into the weeds (e.g. tulips).  In the present case, I think the speculators are doing what has to be done.  The US won't raise carbon and consumption taxes, putting our economic house in order.  So the speculators (along with tight supplies) will  job for us.

Many say we will see $3.50/gal this summer.  If you factor in Iran, who knows how high it could go. Everyone knows America MUST get off the oil.  After September 11, 2001 I expected our President to call on Americans to GET OFF THE OIL.  I was expecting a speech like the one JFK gave that motivated us to reach for the moon. As you know, this never happened.  Eventually I realized that the only way this is going to happen is for us to do it ourselves.  To that end I created this idea and have been trying to make it a reality..

The EPA is offering a research grant opportunity that I believe is a perfect fit for this idea.  I have sent an e-mail to a hand picked list of university professors who have experience with government research projects.  I'm looking to form a research team to apply for the EPA grant, conduct a social-economic experiment and surveys to determine to what extent the American public will support it, project the economic potential of WPH, and identify logistical, social and political obstacles as well as opportunities.

All government grants are awarded based on merit of the proposed research.  I believe WPH has merit but your help is needed to verify it. You can help by posting your feedback.  Let the professors and the EPA know what you think about WPH.  Do you think this idea is worth pursuing? We need to know if Americans will support a plan like this.

Do you have any ideas to improve the plan?

Share any and all of your thoughts.

Tell your friends and family about this Blog post and ask them to post their thoughts on WPH


Thank you