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:
U.S. oil refinery delays may spur supply crunch
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.
The oil and gasoline guys are palying a dangerous game (for them). Every price sike if further embedding permanent change in busines and consumer behavior.
The guy who buys a 34 mpg car does not trade it in immediately just because gasoline prices recede a bit.
If there are recurrent spikes, then that guy keeps his car, and maybe next time buys a car that get 45 mpg.
Anyway, for now there seems to be floods of oil everywhere all the time. We can import gasoline from Europe, and India is bringing more refineries online.
I think we are one more price spike away fom permanently damaging global and local oil markets.
I am a little puzzled also why RR is talking about supply crunch. While US gasoline demand has flatlined with last year, last year was a down year. And now, with 500,000 Americans losing their jobs every month, I really don’t expect a rebound in demand. Add to that the post-Katrina refineries coming back online.
My guess is that the US fleet of cars is slowly improving average mpg now, though car sales are dead.
I wish we would add a $4 tax onto gasoline, at the rate of about $1 a year, or 25 cents per season.
Oil up $4 a barrel today. Weird trading of late.
I am a little puzzled also why RR is talking about supply crunch. While US gasoline demand has flatlined with last year, last year was a down year.
I am not so interested in where we were last year. I am trying to estimate where we are going to be. As the previous post showed, gasoline demand has already recovered to the levels of a year ago. This, despite the difficult economy. With refiners now taking a ‘wait and see’ approach on adding capacity, as the article says as economic conditions start to improve we could be caught flat-footed.
Again, it isn’t a problem in the short-term. It is a long-term issue.
RR
Maybe someone found a way to get oil from Cushing,Ok. to the rest of the world. Brent crude is $10 a barrel more than WTI. Even heavy sour crude is fetching more than light sweet right now. That’s nuts.
The oil and gasoline guys are palying a dangerous game (for them). [sic]
Anon, you’re assuming someone is steering the bus. Other than Bill O’Reily, noone believes that. It’s a free market, getting steered by millions of partakers. Add the lack of good information (Thanks, OPEC!), government interference (For our own good, I’m sure) and nervous money (with good reason) and the table is set for much instability. Hold on to your hat!
Anyway, for now there seems to be floods of oil everywhere all the time. We can import gasoline from Europe, and India is bringing more refineries online.
Careful that you don’t confuse oil and refined products (like gasoline and diesel)! Hint#1: Refineries don’t produce oil, they consume it. So more refineries mean higher oil prices (and lower refined product prices), in spite of our friends at OPEC’s frequent claims to the contrary.
I am a little puzzled also why RR is talking about supply crunch.
Hint#2: Look at the data that RR provides, free of charge…
My guess is that the US fleet of cars is slowly improving average mpg now, though car sales are dead.
Hint#3: You have something stronger than a guess, Champ?
Hint#4: You know, like data?
Optimist-
Good points, but…
1. Yes, there is someone at least trying to grab the wheel of the bus, and that is OPEC. They say they are cutting output by 4.5 mbd. While I may believe in a glut, maybe the OPEC action will lead to another price spike at some point. Also, OPEC may be doing dirty on the NYMEX. No one knows.
2. Yes, but more refineries means lots of gasoline everywhere. They have to sell it into a competitive market. If US refineries can’t fill demand, then we import it. So why a gasoline shortage, especially if demand may not rise at all in coming years, as the US fleet becomes slightly more efficient?
3. On Cars. I have no data, but during the $4 gas days, only higher mpg cars were selling well. That may change. We both know car sales are dead, so the fleet average will be slow to move in any direction. I suspect over time the fleet average will start to rise, because of this last price spike, and consumer and manufacturer memory.
50 years after the Great Depression, my father (wbo lived through it) still could not enjoy an expensive restaurant. One more price spike…..and consumers (some portion) will say “Never again.”
They will buy a 45 mpg car and be done with it. It helps that more options will come on stream.
Also, manufacturers may not want to be stuck with only a seleciton of low mpg cars in the future. They may shift their fleet to higher mpgs, anticipating another spike.
We have been hearing about pending gasoline shortages now for years in the USA, and it has not happened. Maybe it is just scare talk. We more likely will have gluts. Demand is flat, even after gasoline prices were cut in half. Congress has rammed through some inadvisable CAFE standards, which will also depress demand. (I prefer gas taxes).
We may be seeing permanently damaged oil markets already. I suspect one more spike and we will see oil go the way of the mimeograph (anybody out there remember those?) A backstop energy source, not the prime one (electricity).
Since oil refinery utilization is in the toilet, of course they are going to delay (perhaps indefinitely) capacity upgrades. Will this lead to higher prices for gasoline? Only if the demand for gasoline returns.
There are some people dipping their toe into the SUV market now that gas is at or below $2. And some people who are permamently spooked from buying a low mpg car. I can’t see demand for gas rising while the price is also rising. A fall in price from $4 to $1.50 caused some of the demand to return. The reverse will cause some of the conservation to return.
Yes, but more refineries means lots of gasoline everywhere. They have to sell it into a competitive market. If US refineries can’t fill demand, then we import it.
Not sure I follow: What does new refineries in India have to do with prices in the US?
We have been hearing about pending gasoline shortages now for years in the USA…
I suspect that comes from the same people who keep wailing about “no new refinery in 30 years”. They seem to miss the point that expanding existing refinery capacity achieves the same thing at lower cost, as RR pointed out before.
Demand is flat, even after gasoline prices were cut in half.
That would be the effect of the recession (depression?). In spite of the bailouts and stimuli, we will eventually recover from the recession. When that happens, I expect to see oil back at $100+/bbl in pretty short order. We’ll see.
I suspect one more spike and we will see oil go the way of the mimeograph (anybody out there remember those?)
You are assuming there is an alternative ready to step into the breech. I don’t see it happening, for a number of reasons. Most significantly: to kick the oil habit we are going to need a cheaper replacement that meets all of oil’s advantages. I see a few contenders, but none ready to dethrone the champ.
A backstop energy source, not the prime one (electricity).
Remember electricity is just an energy carrier, not a source. The source would be coal, nat gas or nuclear. Each with its own issues.
“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.”
Why so coy, RR? Can you be more specific about an investment strategy to take advantage of expected higher gasoline prices?
If you think crack spreads will get better,but a refiner like Valero Anonymous. They’ve already increased quite a bit. That’s why gas at the pump is going up while oil prices are still heading down.
On a related topic, is anyone willing to conjecture why the US diesel vs. gasoline price ratiio remains greater than 1 (diesel>gas)?
I've heard several hypotheses, but none that I'm willing to accept. The change to more expensive diesel seem to have occurred about 2003.
C'mon Benny, you must have have an idea!
I can’t see demand for gas rising while the price is also rising.
But that’s exactly what’s been happening. Demand has been picking up, even though prices are rising. You are correct that at some point rising prices will arrest and reverse demand, but there is a very big 3rd world out there that aspires to a 1st world standard of living. That’s why I continue to believe that oil is one of the best long-term investments out there.
RR
Why so coy, RR? Can you be more specific about an investment strategy to take advantage of expected higher gasoline prices?
I don’t want to ever be accused of giving specific investment advice. I believe gasoline prices will head higher. This is good news for refiners, and those who own gasoline futures. Personally, I own ConocoPhillips and Petrobras, neither of which are pure refiners. However, rising gasoline prices should benefit them as well, just less so than it would a pure refiner. For COP and PBR, rising oil prices will see their stock prices take off (although my PBR is already up 70% from when I bought it).
RR
I’ve heard several hypotheses, but none that I’m willing to accept. The change to more expensive diesel seem to have occurred about 2003.
The change was phased in, but the biggest piece occurred in 2006. It was during this time period that diesel and gasoline swapped pricing spots.
I have pointed out several reasons that diesel is now more expensive than gasoline. Here is something I wrote in a previous essay:
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If you tell refiners they must install equipment to produce ULSD, there are four things to keep in mind.
First, this necessarily redirects capital that might have gone into expanding refining facilities. Second, it increases the costs of producing the fuel. Third, this additional level of processing reduces the overall product yield. Fourth, and perhaps of greatest importance, it increases the complexity of the refinery. Those are the consequences. The more complex the refineries are, the more unreliable they are going to be. So, when you formulate these sorts of rules, don’t sit around and scratch your heads and ask “Gosh, I wonder why prices are going up?” A big part of the reason prices are going up is because of the policies that have been enacted. Many of which – as in the case of various environmental regulations – I agreed with. Nonetheless, these are issues that helped crimp supplies and add to costs.
RR