Gasoline Prices -- Yikes!
Sigh. We were going to write you a nice Earth Day commentary today. But then we bought gas during the weekend and paid 30 cents more a gallon – nearly 10% more – than we had paid only two weeks ago. So we thought maybe we should talk about that instead.
In our last commentary on April 1, we expressed concern about rising energy prices and how our spending for energy is eating into our incomes. The information we used then covered February, a month when petroleum prices were actually down, albeit briefly. Our estimations, using US Commerce Department data, showed people's energy expenses absorbing about 13.8% of our take-home pay. But at that time, gasoline averaged "only" $3.03 a gallon. Now, in yesterday's AAA survey, the national average is $3.503. That's enough to push the energy burden on income to at least 15-1/2%, sapping billions of dollars from consumers' discretionary purchasing power.
In our last commentary on April 1, we expressed concern about rising energy prices and how our spending for energy is eating into our incomes. The information we used then covered February, a month when petroleum prices were actually down, albeit briefly. Our estimations, using US Commerce Department data, showed people's energy expenses absorbing about 13.8% of our take-home pay. But at that time, gasoline averaged "only" $3.03 a gallon. Now, in yesterday's AAA survey, the national average is $3.503. That's enough to push the energy burden on income to at least 15-1/2%, sapping billions of dollars from consumers' discretionary purchasing power.
Price Gouging Not in Evidence
How did this happen? Are the oil companies ripping us off – again? Well, no. What we find is that beyond movements in the world price of a barrel of oil, there is little evidence that gasoline consumers are being gouged.
At the wholesale level, refining margins have decreased. That is, the value of the products produced at oil refineries has gone up less than the cost of the crude oil that goes into them. Last week, ended April 18, this amount, the so-called "crack spread", was $13.96 for a barrel of Texas oil. A year ago, it was $20.40. Over the last four weeks, the crack spread has accounted for 11.6% of the value of the gasoline and heating oil produced in the refineries. This is down from a five-year average of 15.2% and about 17.5% during the late 1990s, when oil was still "cheap". So refiners are not adding to our woes.
Nor, apparently, are our local gas stations. We looked at the difference between retail gasoline prices and the wholesale "spot" prices. In the late 1990s, this spread was about 60 cents a gallon. Over the last four weeks, it was 68 cents, and in the last week alone (ended April 14), it was only 57 cents. So our stations are not taking a bigger piece of the pie, and on a percentage basis, it's considerably smaller. In fact, during the last year, the retailers' spread over cost has represented 24% of the retail price, but historically, just over than half of that price we pay was added by the stations themselves.
At the wholesale level, refining margins have decreased. That is, the value of the products produced at oil refineries has gone up less than the cost of the crude oil that goes into them. Last week, ended April 18, this amount, the so-called "crack spread", was $13.96 for a barrel of Texas oil. A year ago, it was $20.40. Over the last four weeks, the crack spread has accounted for 11.6% of the value of the gasoline and heating oil produced in the refineries. This is down from a five-year average of 15.2% and about 17.5% during the late 1990s, when oil was still "cheap". So refiners are not adding to our woes.
Nor, apparently, are our local gas stations. We looked at the difference between retail gasoline prices and the wholesale "spot" prices. In the late 1990s, this spread was about 60 cents a gallon. Over the last four weeks, it was 68 cents, and in the last week alone (ended April 14), it was only 57 cents. So our stations are not taking a bigger piece of the pie, and on a percentage basis, it's considerably smaller. In fact, during the last year, the retailers' spread over cost has represented 24% of the retail price, but historically, just over than half of that price we pay was added by the stations themselves.
World Oil Demand Up, But Not in US
So to find the source of our current problems, we need to go to the underlying oil market itself. Here on Earth Day, we can talk for two reasons about conserving use: the environment and the cost. And we can also tell you that conservation is happening. According to some proprietary data from Energy Intelligence, a private consulting firm, oil demand in the US was the lowest in March in five years. It hasn't come down a lot, 600,000 barrels per day, from the March peak of 21 million in 2005, but it certainly is not rising. [Oil usage varies with seasons, so we look at the same month each year to make our comparisons.] Demand in Europe has also eased, to 15.5 million barrels/day this March from a peak of 16.3 million in 2006. As you've perhaps heard, it's China and India where the gains are. Their consumption isn't yet nearly as large as in the US, but they are growing: China is up to 7.9 million barrels daily from 6.7 million in 2005 and India 3.1 million from 2.6 million in 2005. Total world usage over that whole period is up to 86.9 million barrels a day in March 2008 from 85.7 million in March 2005.
The price pressures come because the total supply can't keep up. March production of petroleum and its products ran at 85.5 million barrels, less than the needs of 86.9 million. But this shortfall of 1.4 million is actually an improvement. The prior three years saw an average of about 4 million; this amount of demand was thus supplied by reductions in world inventories. This is an important point. It took a while for the higher prices to have an impact, but they are bringing out more supply. It now pays to go after the harder-to-reach oil deposits, and part of the recent supply increase is the opening of a new North Sea field. And despite the insistence by OPEC that they are not raising their production target, they are raising their production. Their output in March was reportedly 36.7 million barrels/day, compared with about 34 million in the prior three Marches.
So to find the source of our current problems, we need to go to the underlying oil market itself. Here on Earth Day, we can talk for two reasons about conserving use: the environment and the cost. And we can also tell you that conservation is happening. According to some proprietary data from Energy Intelligence, a private consulting firm, oil demand in the US was the lowest in March in five years. It hasn't come down a lot, 600,000 barrels per day, from the March peak of 21 million in 2005, but it certainly is not rising. [Oil usage varies with seasons, so we look at the same month each year to make our comparisons.] Demand in Europe has also eased, to 15.5 million barrels/day this March from a peak of 16.3 million in 2006. As you've perhaps heard, it's China and India where the gains are. Their consumption isn't yet nearly as large as in the US, but they are growing: China is up to 7.9 million barrels daily from 6.7 million in 2005 and India 3.1 million from 2.6 million in 2005. Total world usage over that whole period is up to 86.9 million barrels a day in March 2008 from 85.7 million in March 2005.
The price pressures come because the total supply can't keep up. March production of petroleum and its products ran at 85.5 million barrels, less than the needs of 86.9 million. But this shortfall of 1.4 million is actually an improvement. The prior three years saw an average of about 4 million; this amount of demand was thus supplied by reductions in world inventories. This is an important point. It took a while for the higher prices to have an impact, but they are bringing out more supply. It now pays to go after the harder-to-reach oil deposits, and part of the recent supply increase is the opening of a new North Sea field. And despite the insistence by OPEC that they are not raising their production target, they are raising their production. Their output in March was reportedly 36.7 million barrels/day, compared with about 34 million in the prior three Marches.
Weak Dollar Does Hurt, Though
These fundamental supply and demand factors interact to increase prices. The price of oil in US dollars has also increased because of the weakness of the dollar in foreign exchange markets. Note, though, that the fall in the dollar does not cover the entire oil price change. The price of oil expressed in euros, for instance, has also gone up. Since March 2006, it has risen about 30%. The exchange rate of the euro has risen by about 30%, so that almost equal parts of the higher dollar price of oil come from the low dollar and tight oil market fundamentals.
These fundamental supply and demand factors interact to increase prices. The price of oil in US dollars has also increased because of the weakness of the dollar in foreign exchange markets. Note, though, that the fall in the dollar does not cover the entire oil price change. The price of oil expressed in euros, for instance, has also gone up. Since March 2006, it has risen about 30%. The exchange rate of the euro has risen by about 30%, so that almost equal parts of the higher dollar price of oil come from the low dollar and tight oil market fundamentals.
Green Is "In": Happy Earth Day!
In Sunday's New York Times, Jad Mouawad, the Times' main energy reporter, bemoans the high cost of oil. "What shall we do?" he seems to complain in his "Week in Review" feature, "The Big Thirst". This situation indeed does not have an easy solution. His article discusses only one aspect, however, adding to supply by finding new sources of oil. As he says, that certainly takes a long time. We are encouraged, though, by numerous efforts to rein in consumption in this country, spurred by a combination of government support and private sector marketing. Have you shopped for light bulbs recently? It's harder to find incandescent ones now, as CFL bulbs begin to dominate. Green buildings and hybrid cars are becoming more prolific. Some car companies are even starting to market hybrids in China. These technological changes will only be accelerated by the high oil prices. The next few months won't be much fun for consumers, but as we've argued before here, "good old American ingenuity" will eventually go a long way toward alleviating high energy costs – and helping the environment in the bargain. Maybe it isn't such a bad Earth Day after all.
In Sunday's New York Times, Jad Mouawad, the Times' main energy reporter, bemoans the high cost of oil. "What shall we do?" he seems to complain in his "Week in Review" feature, "The Big Thirst". This situation indeed does not have an easy solution. His article discusses only one aspect, however, adding to supply by finding new sources of oil. As he says, that certainly takes a long time. We are encouraged, though, by numerous efforts to rein in consumption in this country, spurred by a combination of government support and private sector marketing. Have you shopped for light bulbs recently? It's harder to find incandescent ones now, as CFL bulbs begin to dominate. Green buildings and hybrid cars are becoming more prolific. Some car companies are even starting to market hybrids in China. These technological changes will only be accelerated by the high oil prices. The next few months won't be much fun for consumers, but as we've argued before here, "good old American ingenuity" will eventually go a long way toward alleviating high energy costs – and helping the environment in the bargain. Maybe it isn't such a bad Earth Day after all.
* * * * *
For some DIY information on saving energy, see the Hodgepodge entry for April 23. Debbie directs you to the US Department of Energy's webpage for a whole catalog of tips. Go to http://geraniumfarmhodgepodge.blogspot.com/ to get connected. We even heard Bill O'Reilly on FoxNews give advice tonight about driving less!
posted by Carol S. | 4/22/2008 03:36:00 PM
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