Riddle Me This?
Posted: October 13th, 2008 | Filed under: Ruminations | 2 Comments »Wholesale gasoline by the barrel is selling cheaper than it has in a long long while. Cost to refineries is about half what it was earlier this summer before the financial crisis, and before people started conserving because the per-gallon cost had gotten so high.
So, Mr. Exxon, riddle me this: If your cost is about half, how come the price at the pump isn’t half what it was?
As I tried to point out to you this morning, chief, it’s simple: the cost of a product and the price it is sold for are only superficially related.
Think about car dealers selling cars “at invoice.” Do you really think they’re selling you a car for no money? Nope. Those are fluid numbers, as are virtually all prices.
The invisible hand of the market determines the price of everything; it is an extremely efficient mechanism that finds out the absolute maximum we’re willing to pay for any given thing, then adjusts to hit that price. And it adjusts constantly, hundreds of times a day, all over the world. This is why gas prices dipped the past few weeks – because people got scared and drove less and less gas was sold. It wasn’t because the price of a barrel went down.
Also, I meant to congratulate you this morning but forgot – in the five years you and I have been doing our little Tuesday Morning Incontinent Dog and Pony Show, this was the VERY FIRST TIME EVER you made it through the whole thing without clearing your throat! I’m so proud of you; I knew you could do it.
Dear Culturemaven,
There are several factors involved here that influence today’s retail (downstream) pump prices going back to 1990 with the passage of the Clean Air Act. There has not been a new refinery built in the U.S. since the mid 1970′s and the Clean Air Act required all refineries to make massive capital improvements to be compliant. Marathon’s Catlettsburg, KY refinery for example only produces 6% of America’s gasoline per year, yet was required by the feds to invest almost half a billion dollars to be compliant with the clean air act. Many independent refiners could not afford to meet regs and shut down, which lowered the total supply. That cost eventually gets passed along to the consumer and that’s only one, small refinery. Independent refiners that do not own massive exploration wells (upstream) don’t pull thier own crude and must buy it on the open market and then pay additionally to have it shipped to the refinery. Crude with higher sulpher content costs less per barrel, but it much more expensive to refine. Most of the largest producers of crude are not U.S. owned (BP, Royal Dutch Shell, Citgo, Petronas, Bharat, LUKoil, Qatar Petroluem, etc.) and we must buy our crude from them. Much of the shipments arrive at the LOOP (Louisianna Offshore Oil Platform) and when we have hurricanes that close the loop or damage the LOOP, then supply is greatly reduced and demand surges, raising the price. Even if it is offloaded to the plethora of crude pipelines that crisscross the country, many independent refiners must pay the pipeline owners to move the crude to the refinery. For example, the Catlettsburg Refinery gets much of it’s crude from the LOOP. A pipeline pushes the crude from offshore Louisianna up to Cairo, IL, then east along the Ohio to Catlettsburg. The massive holding tanks you see at Catlettsburg only hold about three days worth of crude before the process must be repeated. If one factors in all the various processes, contracts, agreements, world economy, Federal, state and local taxes, the markup from the refinery to the jobber (distributor of refined product to the store and adds the various detergents to the gasoline) markup by the retailer, it’s amazing how it gets to your car at the price it does. All U.S. refineries run at maximum capacity to meet demand. When refineries have to shut down do to shceduled maitenance, accidents, weather, etc., supply is not met and prices surge. I’m not an advocate of high pump prices, but I don’t think there is a good understanding of the complexity how the process is completed. This is not to mention that only a relatively small amount of a barrel of crude oil actually goes to make gasoline. Crude also winds up as asphlalt, motor oil, comuter processors, toothpaste, resins, coatings, paint, artficial knee joints, the soles on your shoes, tires, volley balls, lipstick, toilet paper, etc., etc. Human existance is so heavily engrained with petroleum, it will be very interesting to see how the next few generations cope.