Implicit in the previous post on the recovery of gasoline demand is that the conditions are setting up for a gasoline supply crunch – and the price rise that goes along with that. As I pointed out, refiners are cut back, but they can turn that around pretty quickly. The low utilization numbers could lead to a short-term supply crunch, but as prices recover refiners can bring capacity up quickly.
What they can’t do quickly is implement new capacity additions. Due to the collapse in oil and gas prices, projects are being delayed, both in upstream oil production and in downstream refining. This is setting up for another run on prices as demand begins to recover. More on this from Reuters:
NEW YORK (Reuters) – The stage is being set for a fuel supply crunch in the United States once the economy rebounds now that refiners have pushed back more than $10 billion worth of upgrades they had on the drawing board.
Pressured by the oil price collapse and the economic malaise, companies have also either slowed or scrapped expansions which could threaten 340,000 barrels per day of new capacity, spelling a return to lagging processing capability that helped push pump prices higher until last year.
“If the economy comes back faster than expected, we are going to be caught flat-footed and we’re going to see a big spike in prices,” said Phil Flynn, an analyst at Alaron Trading in Chicago.
This isn’t something that will play out short term, but if your strategy for investing is more long term (as mine is), these project postponements will come home to roost in the next 2-3 years. Gasoline prices in the next few years should be higher, and maybe much higher than they are right now.
Think back to Hurricane Katrina. We got a big price spike in the wake of Katrina. That was the short term impact. But longer term, a lot of refinery capacity was offline for a very long time, and that helped lead to two straight years of record-breaking gasoline prices.