I have a challenge for the conspiracy theorists out there who think oil companies purposely dropped the price of gas leading up to the recent elections. Here is the gasoline inventory graph for the past year, which the EIA just updated today at This Week in Petroleum:
Note that gasoline has dropped below the bottom range of where inventories typically run at this time of year. We are one pipeline or major refinery issue away from having a serious gasoline supply crunch. So, what do you do? If prices increase, people cry foul. Yet demand hit an all time record for this week of the year (despite this, prices fell today). Personally, I think prices need to come up (as they have been trending lately). Obviously, though, they haven’t come up enough yet to stem demand.
So, what are the options? Do you 1). Raise prices and have people cry conspiracy; 2). Keep prices steady and start rationing gasoline; 3). Just risk having lower inventories? Or if you have another solution, let’s hear it. Note that refinery utilization is back over 90%, so cranking up the refineries is out. Gasoline imports dropped off precisely because prices had fallen, so it is going to be tough to attract more imports without a price increase.
This is the dilemma for oil companies. There really is only one fix for this, but it comes with charges of conspiracy. As one profanity-laced diatribe (that I deleted) noted in the comments a few days ago “You claim inventories are driving prices, but the public knows it’s just greedy oil companies.” I guess I should have asked him for a solution before I deleted his post.
6 thoughts on “This Week in Petroleum 12-06-06”
I have a challenge for the conspiracy theorists out there who think oil companies purposely dropped the price of gas leading up to the recent elections.
It sounds to me like you are conflating two different camps of “conspiracy theorists”. I use quotes because I don’t really think the more common sort — the ones who cry foul any time the price of gas goes up — are really conspiracy theorists at all. They’re just American consumers with an overlarge sense of entitlement, trying to find someone else to blame for the wages of their own sins.
The other sort of conspiracy theorist claims that specific market manipulations were undertaken to drop the price of gas in the short term right before the election. This may or may not be a theory that holds water, but it is, under any circumstances, distinctly different from the first kind.
Maybe there’s a connection here that I don’t see; if so, please inform me. Otherwise, I don’t think you’re doing yourself or the Peak Oil community any favors by conflating them.
As a side note, I have heard one possibly credible charge relating to the price of gas right before the election, which is that Goldman Sachs unloaded ~$6B worth of gas futures over the course of a couple of days, thus depressing the gas markets temporarily. Certainly there were other effects acting at the same time and in the same direction, and it’s also pretty much impossible to say whether GS did what they did, if they did it, for sound financial reasons or for some more nefarious purpose. Nevertheless, I would be interested in your take on this specific incident. What do you think?
Robert, I really enjoy your comments/insights over at the TOD. Two likely stupid questions:
– On the EIA’s weekly report, the sum of finished gasoline production and gasoline imports has been consistently and materially higher than gasoline demand, yet gasoline inventories have declined. I realize that the EIA numbers are based on unscientific sample polling, but that large and consistent of a disconnect implies a systemic issue that I’ve not seen discussed or explained. What am I missing?
– My recollection was that one of the explanations of high crude prices earlier in the year was “insufficient refinery capacity”. That doesn’t make sense to me. If we have a situation (which we seem to be approaching currently) where product inventories are low, refinery utilization will be high, but if that capacity is the constraint crude would continue to pile up in inventory and would go down in price, wouldn’t it? I would think that you’d ample refinery capacity to draw down crude inventories and/or raise crude prices. What am I missing?
I use quotes because I don’t really think the more common sort — the ones who cry foul any time the price of gas goes up — are really conspiracy theorists at all.
No, I don’t either. Those are people who don’t understand what drives prices. The conspiracy theorists are in the same camp as that, though, so I am trying to get them both to see the inventory graphs and understand why prices move.
As a side note, I have heard one possibly credible charge relating to the price of gas right before the election…
That happened in August, quite some time before the election. If your purpose was really to move gas prices right before the election, why not make the move in October?
Regardless, the case is simply speculation. The fact is, gasoline did look to be priced too high given the inventory situation at that time. Look at the inventory graph again (July-Aug time frame), and you will see that high prices weren’t sustainable with inventories as high as they were. They probably recognized this, and reduced their holdings. They may have exacerbated the problem, but there is no evidence that was the intent.
On the EIA’s weekly report, the sum of finished gasoline production and gasoline imports has been consistently and materially higher than gasoline demand, yet gasoline inventories have declined.
Jerry, I show the 4-week average demand at 9.264 million bpd. The values for production are 8.85 and for imports is 1.026. My guess at the discrepancy is that a big part of the imports are ethanol, which gets categorized as a blending component.
My recollection was that one of the explanations of high crude prices earlier in the year was “insufficient refinery capacity”. That doesn’t make sense to me.
It didn’t to me either, and my prediction was that gasoline would go up and oil would go down. I know some traders who made bets on this. It did happen to an extent, but not as much as I expected. I discussed this with some people that follow the markets closely, and their best explanation was that sellers were reluctant to bid down crude as long as gasoline prices were high. At the time I commented that the market is a bit disconnected from the real world here.
I am a senior oil market analyst at EIA and the main author of “This Week In Petroleum”. I just wanted to interject myself into the conversation about how the gasoline production and imports add up to be more than demand, yet the stocks fell.
Since gasoline that is blended with ethanol or any other blending component is counted as production when it becomes finished gasoline, including blending component imports (and stock change) into the demand equation would be double-counting the blending components. You need to add the production (blending into finished gasoline is included here) to finished gasoline imports and then subtract an estimate for exports (usually the last monthly data point) and compare this to demand to see if stocks go up or down. When you do this, I think you will find everything balances.
Doug, thanks for stopping by. I read This Week in Petroleum every single week, and I am usually clicking on it (and the inventory reports) within 5 minutes of publication. It is very valuable information, and you are doing a great public service. Thanks for clarifying the point above.
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