Drowning in Gasoline

It sort of crept up on me, but last night as I reviewed This Week in Petroleum, I was struck by just how fast the U.S. has built gasoline inventories. Currently at 230 million barrels, I could not recall ever seeing gasoline inventories that high. So, I went back and looked, and the last time gasoline inventories stood at this level was in 1994. While crude, distillate, and propane inventory levels are typical for this time of year, the gasoline situation bears investigating.

Inventories from a year ago were fairly high at 222 million barrels, but then in mid-February we started a steep slide (accompanied by a steep increase in gasoline prices) to record low territory. We bottomed out in May – just before summer driving season – at 193 million barrels. We then struggled to build inventories back, and spent from May until December hovering along near the bottom of range for gasoline inventories.

But starting in December, we had a very steep build that has now put us well above normal. Why, and what is the significance?

I think the “why” is two-fold. First, gasoline prices this winter were much higher than they were a year ago. There were conflicting reports about whether gasoline demand had fallen, and by how much, but EIA data do suggest that demand during late 2007 fell marginally year over year. It is encouraging to me that (some) people are willing to change (some) behaviors as prices soar.

Of more significance, though, is the difference in imports from a year ago. In late 2006, gasoline prices really crashed, and this had an impact on imports; they fell from previous year levels. In late 2007, gasoline prices were about $0.80/gallon higher than the prior year levels, and this attracted more imports. The sharpest contrast can be seen by comparing December 2006 to December 2007. In 2006, imports were never above 1 million bpd, and in 2 of 4 weeks they were below 900,000 bpd. In 2007, imports were only just shy of 1 million bpd once (0.985 million bpd) and then in 2 weeks out of 4 they were above 1.1 million bpd. That is the primary reason inventories bounced back so sharply starting in December of 2007.

We could still potentially see $4 gasoline by summer, but it is looking increasingly less likely that inventories will drive the price as they did last year. Inventories should start to come down as turnaround season gets into full gear, but we are starting this year in a more comfortable place than last year. To hit $4 by summer, oil prices will need to continue the current run – maybe to the $120/bbl range – and/or gasoline inventories need to start coming down quickly. If oil holds at around $100, we are going to have to see a pretty steep draw to get to $4 before summer.

29 thoughts on “Drowning in Gasoline”

  1. Interesting… I wonder why gas prices in the bay area (California) jumped so much in the past 2 weeks. I saw regular unleaded go up almost 30 cents these last two weeks.

  2. Terry, stocks on the West Coast (PADD V) have actually been on a slight downward trend. I don’t have any particular information on why, other than that, prices there might have gone up. It could be that a major refinery turnaround was announced, but I suspect, more than anything, the culprit is the run-up in oil prices from the past two weeks.

  3. I have a friend that is a steam engineer at the local refinery/upgrader. Due to the profitability in the last few years and going into a relatively long turnaround in March, they have been working a lot of overtime.

    I don’t know enough about the specific refinery economics, but building output inventory while having to pay for input material and labor takes cash in any business. This year, the refineries probably have the cash available to run up inventory.

  4. Is any of the inventory build driven by the multiplication of “boutique” gasoline blends that states have been mandating?

    The figures report total stocks. But if various blends can be used only in specific locations (and at specific times of year), the total volume of stocks required will probably be higher. Might also explain part of the California price jump. One way or another, the end-use customer has to pay for inventory.

  5. I saw TWIP on Thursday and wondered about this as well. It makes no sense. High gasoline inventories should mean US refiners cutting back crude runs, which should in turn drop crude prices in the short run. Yet we see both gasoline and crude rising in price.

    But that isn’t happening. I think the energy futures markets are totally driven by speculation now on world events and not by fundamental supply and demand.

    BTW – I ALMOST paid more than $3 for gasoline yesterday. The marquis said $3.01 but they hadn’t changed the pump price. It was still $2.98. Prices here in Houston are up $.20 in the last 2 weeks while PADD 3 is awash in gasoline inventory.

  6. Gas prices have been lagging oil prices for some time, it’s a competitive retail market and no-one wants to lose market share. I think this has been keeping gas prices low already, so even with high stocks there is not much room to cut prices.

    I think that speculators amplify underlying trends, but don’t create them. 90% of the current price is down to fundamentals. Production has been flat, and demand continues to rise. Econ 101 says that means prices rise. That is how the market works.

    Since this mechanism is so simple, I never really understand why people blame the boogieman instead.

  7. Here is a short piece from July of last year.

    Gasoline prices could decline by 2010 amid a “potential oversupply” of oil products, even though U.S. refining capacity will be expanded less than previously thought, according to a new report by Edinburgh, Scotland-based consultancy Wood Mackenzie LTD.

    Wood Mackenzie went on the predict a global refinery glut.

    Add to this falling demand for crude and gasoline in most of the industrialized world (China is the exception, for now).

    The LA imes recently rported California gasoline consumption down 1.1 percent in 2007 from 2006.

    Back during the last price spike around 1980, worldwide demnd for crude fell by 11 percent, and did not recover for a full 10 years.

    I’ll say it again: These are the first signs of Peak Demand (the present gasoline glut), and of a crude glut somewhere out there. Maybe in one year, maybe in three. It will happen.

    I agree with kingofkaty that it is speculation that is fueling oil prices (and a general commodities boom). The Oppenheimer analsyst Gheit thinks so too.

    There is concern that Thug States, which control the world’s oil. will keep exporting less and less due to simple thuggery and internal use. That is what Jeffrey Brown worries about.

    It is certainly legitimate to worry that Thug States won’t produce the oil the world needs, and that no amount of contracts or pleading or even invasions will correct that.

    But, with some small luck and conservation, and alternative fuels, we should be able to break the back of OPEC and thug egimes rather easily (in terms of oil prices).

    A truly interesting even could be shaping up: When the hedge funds and speculators find out they are financial Wily Coyotes, they will all start selling at once.

    I think it is possible we see declines on the order of $10 a day in 2008 or 2009, and even $30 oil.

    After all, oil cost $10 a barrel in 1999.

  8. Sorry to post this off-topic, but I had a question, and there seems to be a lot of reasonable, technologically minded people here that I haven’t necessarily found elsewhere.

    In nuclear power, I know “spent” nuclear fuel rods often go into adjacent cooling pools for a protracted period of time. They are still hot figuratively and literally, i.e. they are still generating heat. My question is: has anyone looked into tapping the heat as a “pre-charge” to the incoming water so that the reactor can run a lower power level to create the same amount of steam to drive turbines (hence saving fuel)? Or even to create more powerful reactor “Complexes” that can provide more power from the same amount of nuclear fuel?

  9. Benny – $30 oil is unlikely. True the marginal cost of production in the middle east is around $10 but there is a lot of production in the $50-60 range that would get shut in if prices drop.

    People keep bringing up this increasing worldwide demand. Where is it in the short run, where it is impacting prices NOW? Worldwide crude production set a new record. I see no evidence that supply is unable to keep up with demand. Where are the regional shortages one might expect if that were true?

    Out in the future if Asian and African economies grow it will push demand for oil, but today. No. I think the current prices are more speculation on the state of current political events.

  10. I see no evidence that supply is unable to keep up with demand.

    With all due respect, King, isn’t the current high price of oil a reasonable indicator that there is a tighter supply/demand balance today than, say, 3 or 5 years ago?

  11. Note to RR:

    There is a website, http://www.bulkoil.com, where purported buyers and sellers of jatropha oil meet. I have no idea if this is legit, or all the buyers and sellers are legit. I found bulkoil when I considered planting jatropha in Thailand (my wife is Thai). I have since gone to planting eucalyptus, at least until (if ever) the jatropha market matures.

    Note to King and Kinua: I think there is abundant evidence of huge speculation in NYMEX crude oil futures. Remember, today hedge funds operate not only with hundreds of billions of dollars, they can leverage that. I think anyone who works the NYMEX will tell you that old-fashioned hedging by large-scale users of oil is but a lesser fraction of the market today.

    My best guess is sooner or later we see a runaway bust. $10 a barrel oil? Yes, though perhaps not sustained. But, for a while, as the hedgies unwind their positons and dump lots of oil onto a market with no buyers, you will see prices undershoot fundamental positions.

    That is what I believe today, and I am sticking with my positions on this for the rest of the day for sure.

  12. Anon – normal radioactive decay does not generate enough heat to serve as a practical energy source. Spent rods give off even less. The purpose of the pool of water is to keep the spent rods cool and to protect from radiation.

    In a nuclear reactor fuel rods are encased in lead shields to contain the neutrons. Exposing a few fuel rods is not enough to maintain a self-sustaining nuclear reaction. A number of rods must be exposed to achieve critical mass. Once reached the reaction is self-sustaining until the fuel is spent.

  13. Kinuach – In a word, no.

    What has changed since last year when crude was $60/barrel and gasoline $2.20? Or even 5 years ago? Worldwide capacity still exceeds demand by several million barrels.

    The price of crude is well above the marginal price of production. I think there is $20-30 of price that is pure speculation. Some of that is also speculation on the US $.

  14. What has changed since last year when crude was $60/barrel and gasoline $2.20? Or even 5 years ago? Worldwide capacity still exceeds demand by several million barrels.

    People’s minds. Commodity pricing where large scale speculation is allowed is based on collective opinion of where the price should be, not supply and demand.

    Residential real estate here tripled in value in the last two years after being stagnant for the past 30. Good for me, bad for new home buyers. There isn’t anything really different here than a few years ago, there is available land for hundreds of miles and although there is a construction labor shortage it’s not critical. There was enough speculation in the underpriced market to adjust the prices and now people believe the houses are worth 3 times what they were. And “alla-peanut-butter-sandwiches” they are.

    Crude is $100, because the group speculative mind has put it there.

  15. The price of crude is well above the marginal price of production.

    King, you could be right. Though that could also be wrong.

    If the price of crude has been driven by speculation to a level well above the marginal cost of production, then why are the marginal producers not expanding production by putting shut-in wells on stream?

    Agreed, there is a lot of speculation in this market. And markets work by over-reacting — both up & down. But I am not sure we can make a case for speculation being the cause of a price run up that has gone on for months. Speculators can push the price of paper barrels any which way, but eventually the contract comes due. Last guy holding that paper has to take physical delivery, and store the oil (expensive) or sell it (spot price).

    Reality is that there is very little surplus capacity, and almost all of it is in the Middle East. When the price of oil is going up and European & US banks are being roiled, there is a lot to be said (from the producers standpoint) for keeping the oil in the ground for later sale. That happened in the Oil Shocks of the 1970s — higher oil prices suppressed rather than increased supply, exactly contrary to normal economic theory.

    Let’s not forget that shareholder-owned oil companies are buying back their own shares instead of investing in new capacity — suggests they have run out of places to invest. Meanwhile, national oil companies are doing more talking about investing in new capacity than actual investing. Which maybe implies that there will be no relief from high prices through expanded supply.

    Of course, price could drop if demand falls. But there is little sign of that so far.

  16. I have an off topic question I would like to ask if it is okay with everyone here.
    I am curious, how many kilowatt hours does it take to fully charge an electric vehicle.
    The cost per charge would be equal to [total kilowatt hours need per full charge]*[$/kilowatt hour].
    Each kilowatt hour currently costs about 10 cents.
    cost per charge/(miles/charge) = marginal cost per mile driven. From this we could calculate life cycle average cost per mile driven (based on wear and tear, reduced efficiency over time, repair bills, battery replacement every five years, and vehicular life)
    (miles/charge) = about 200 for many electric vehicles (Tesla is about 220.)
    I am trying to calculate these numbers. Any help would be greatly appreciated.
    One question I have is that at what price per kilowatt hour will electric vehicles, and plug-in hybrids start to become cheaper per mile (on a life cycle cost basis) than purely fuel based vehicles? If electricity prices fall below this price, then we will start to see a reduction in oil demand, and a greater substitution from oil to non-oil derived electricity.

    Thanks for everyone’s help.

  17. Just calculated some data on the Tesla Roadster:

    Joule = 2.7778 × 10−7 kilowatt-hour
    MJ = 2.7778 × 10−1 kilowatt-hour
    1 mile = 1.609344 kilometers

    The Tesla roadster generates 1.14 km/MJ or 0.695935735305814 miles/MJ or 2.5053486043121 miles/kilowatt hour

    Joule = 2.7778 × 10^−7 kilowatt-hour
    MJ = 2.7778 × 10^−1 kilowatt-hour
    1 mile = 1.609344 kilometers

    The Tesla roadster generates 1.14 km/MJ or 0.695935735305814 miles/MJ or 2.5053486043121 miles/kilowatt hour

    = about 2.5 miles per killowatt hour (marginal rather than life cycle average cost)

    = about 40 miles per dollar marginal at current electricity prices of 10 cents per kilowatt hour (life cycle cost per mile is much higher)

    Summary, plug in hybrid and electric vehicles are close to being more economical than fuel based vehicles, at current electricity prices. We can expect non-electricity energy use to gradually be substituted by electricity based energy over the medium to long run.

    Note that the majority of global oil use is for transportation.

    This will likely place a long term put option on the price of oil.

    I would be interested in everyone’s comments

  18. Benny “PD”:

    I think your understanding of hedge funds, vis a vis their oil investments, is a bit naive. They generally deal in futures when it comes to commodities; that is, they’re making bets on the PRICE. They’re not carrying the actual oil around in their back pockets; when they unwind their positions, nothing gets spilled, and there’s no market glut.

    As for $10 oil, I suggest you put your money where your mouth is on that one. I’m certain you can find someone to take that bet.

    I did have a good laugh, though, at this:

    There is concern that Thug States, which control the world’s oil. will keep exporting less and less due to simple thuggery

    Simple thuggery! Ah, were it ever so simple.

  19. Anand wrote:
    We can expect non-electricity energy use to gradually be substituted by electricity based energy over the medium to long run.

    There are lots of people hoping that will be the case. Set aside all the concerns about large-scale availability of exotic materials for batteries. Large-scale use of electric cars inevitably means that demand for electricity will go up.

    But electricity has to be generated as & when required from some energy source — and on a very large scale, given what it would ultimately take to replace a large part of the ~45% of global energy coming from oil.

    How is that additional large-scale demand for electric power going to be met? We need to consider the total transportation system, not just one component.

  20. Thanks for your comments Kinuachdrach. Your point is well taken. I have my own thoughts about it, which might share later.

    Before we get to that, I have a question.

    Global electricity production is about 18 peta watt hours a year (http://www.eia.doe.gov/oiaf/ieo/electricity.html)

    If we were to measure global energy use using watt hour units (electricity + trasportation fuel + heating fuel + all other nonelectricity uses), how much would it be?

    What would be the watt hour equivalents for each of the other catagories of energy use?

    Where would be a good source to research this?

  21. The effect of supply and demand is easily seen on ebay. One week, an item will sell for its starting bid. The next week, the exact same thing from the same seller will go for 2 or 3 times its starting bid. The only difference is that last week there was one bidder, this week there were 3 or 4.

    The marginal costs of the seller were identical, the only difference being this week there were more bidders, i.e. higher demand. If demand exceeds supply, the price goes up.

    This really is Economics 101, there is nothing mysterious going on.

  22. Anand asked:
    Where would be a good source to research this?

    One of the most convenient sources is British Petroleum’s Annual Statistical Review. Check it out at http://www.bp.com.

    Remember that electricity is NOT an energy source — it is a way of conveying energy from a power plant to where it is needed. (The much vaunted hydrogen economy would be the same — using hydrogen as a means to move energy from power plant to point of use). Globally, almost 90% of energy comes from fossil fuels, with the remainder split approximately evenly between nuclear & hydro-power.

  23. You are correct Kinuachdrach. I wrote loosely earlier.

    I am searching for a break down of energy use by type:

    1) electricity generation
    2) transportation fuel
    3) heating fuel
    4) other types

    To calculate this, we need some kind of standard energy measurement unit. Perhaps kilo watt hours? If so I would like to convert all the energy utilization categories into kilo watt hours or kilo watt hours equivalents; so that a percentage breakdown can be computed.

    Are you refering to this link: http://www.bp.com/liveassets/bp_internet/globalbp/globalbp_uk_english/reports_and_publications/statistical_energy_review_2007/STAGING/local_assets/downloads/spreadsheets/statistical_review_full_report_workbook_2007.xls

    from this page: http://www.bp.com/productlanding.do?categoryId=6848&contentId=7033471

    Any addition info is also welcome.

    Thanks for your help Kinuachdrach.

  24. That’s right — BP Statistical Review of World Energy


    Download the workbook & play around to your heart’s content.

    The US Energy Information Agency is another useful source. Oil & Gas Journal also produces an annual summary of global oil & gas production — figures are different from those given by BP. Caveat emptor!

    Kilowatt-hours (“Poor Boys’ Joules”) may not be the most suitable unit, thanks to the Laws of Thermodynamics and energy rejected at heat engines. BP’s statistics tend to be in millions of (metric) tonnes oil equivalent per annum — the input, rather than the output.

    As a matter of courtesy, you might want to consider dropping a line to our host, Robert Rapier. See if you can interest him in starting a thread dealing directly with your interests.

  25. Robert Rapier, my apologies for posting off topic questions. Thank you and everyone else here for teaching me so much. 🙂

    Is it okay for me to keep commenting on this subject here?

  26. We should treat oil like cigarettes,and tax the hell out of it until people quit. The biggest downside is addicting government to the tax revenue. Trust me,if Uncle Sam slapped a $5 per gallon tax on gasoline,most folks would find another way to get around. The people who stuck with gas would fund a renewable energy boom if Congress put those taxes back to work on wind power,solar etc.
    The U.S. added enough wind power farms last year to power 1.5 million homes. Imagine what we could do with the right incentive.

  27. Is it okay for me to keep commenting on this subject here?

    Not a problem. This site is for discussing energy, and as long that is the topic, I have no issues. I also don’t have a problem with things veering off into other areas, and only lock a thread if it starts to become spam.

  28. maury;
    Heh. Taxing cigarettes and discouraging smoking turns out to be a costly decision. It now turns out that smokers cost the health care system LESS than any other category of user; the most costly are skinny non-smoking health nuts. They live too long. Us smokers die sooner, and terminate the expenditures far short of the extravagant, wasteful totals the rest of you ring up. In effect, we’re subsidizing your doomed efforts at living forever. ;D

  29. anand, maury, et al.;
    focusfusion.org finally managed to scrounge together the paltry few million needed to complete its research and development program. As a result, in 5 or 6 years we should see the first small fusion generators (they’re all small, it’s the nature of the process they’re using), turning out power at about $0.001/kwh. Oil, solar, wind, coal, gas, etc. are not even remotely competitive.

    As for the “exotic materials”, Stanford and Toshiba have developed a silicon nano-wire manufacturing process for lithium batteries which multiplies capacity by 10 and charging speed by 60. Using known, currently available technology.

    Hold onto your hats.

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