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October 31, 2012

A Look at the Forward Price Curve

 

As part of our ongoing commitment to monitoring patterns in fuel pricing, we at Pumps are going to start posting regular updates showing changes in the forward price curve for RBOB Gasoline. Today we will look at the change in the forward price curve over the month of October.

(Click to Enlarge)

Clearly, this chart shows a drop in future wholesale prices that is consistent with the seasonal trading pattern seen in crude oil trading. We have come well off of the Summer highs and expect to hit the lows at some point in the middle of Winter. We expect to see more interesting patterns in the future due to price shocks and other unexpected events, but for the moment this is the trend we would expect for the Fall season.

Filed under:Fuel Budget,Fuel Price Trends | by Eyes on Energy @ 2:10 pm | 

October 30, 2012

Bank of America on Hurricane Sandy

 

Many are struggling to quantify the loss of life and property that will naturally accompany a storm like Hurricane Sandy, but very few are looking beyond these immediate concerns to see the broader market implications. Among these few are Bank of America Merril Lynch, which had this to say in its commodities briefing this morning:

“Oil markets are focused on the imminent arrival of Hurricane Sandy on the US East Coast, with product cracks up but crude lower in sympathy with a stronger USD and weaker equity markets in Europe and Asia. The impact on oil is not clear cut with the risk of supply disruptions on one hand and demand destruction on the other. Either way, the event is a reminder of how events pose a risk to record low middle distillate stocks in the Atlantic Basin, especially given a decline in refinery capacity this year and expectations for modest growth next year.”

Indeed, gasoline futures went up by 2.1% over the course of the trading day today, rising for the third consecutive day. Refineries on the East Coast remain out of commission for the time being. We at Pumps will continue to monitor the situation.

Filed under:Causes and Solutions,Price Shocks | by Eyes on Energy @ 12:01 am | 

October 28, 2012

Hurricane Sandy Shuts Down East Coast

 

While people on the Atlantic Coast are still making preparations for Hurricane Sandy, East Coast oil refineries  have already been adversely affected by the storm. CNBC reports:

“Oil refineries along the U.S. Atlantic Seaboard, having put their storm preparedness plans in place, began to cut rates on Sunday ahead of Hurricane Sandy’s expected landfall along New Jersey’s barrier islands spurred by fears of power outages. Six East Coast oil refineries representing 1.19 million barrels per day — or 7 percent of total U.S. capacity — could potentially be hit by the deadly storm.”

As a result, gasoline and heating oil prices rose significantly over the past week. According to Phil Flynn, a senior market analyst at Price Futures Group in Chicago:

“Oil would have closed lower, if not for the Frankenstorm…It’s obviously having a bigger effect on heating oil and gasoline because supplies are tight. If the storm shuts refineries and we’re then hit by a cold snap, we could see heating oil prices surge.”

Hurricane Sandy has yet to make landfall on the East Coast, but is expected to within 24 hours. We at Pumps will keep a close eye on this as the situation develops. In the mean time, we encourage our readers to cooperate with the National Weather Service and all state and local authorities. Seek shelter and stay safe!

Filed under:Price Shocks | by Eyes on Energy @ 11:36 pm | 

October 25, 2012

Good Question for an Election Year

 

Why doesn’t the President freeze gas prices?

For those of you who are not regular readers of The Straight Dope, I’m publishing a question posed to Cecil Adams, who can ferret out the answers to anything (no matter how ridiculous it may seem).

Here’s the query:

Dear Cecil:

My wonderful father, born in 1939, insists high gas prices are the only reason the economy is in the tank (no pun intended). He constantly tells me Richard Nixon was able to stave off economic hardship for our country because he froze gas prices during his presidency and that if Obama truly wanted to improve the economy, all he would have to do is freeze gas prices too. Did Nixon actually freeze gas prices? Could Obama, if he wanted to, do the same so I could pay $2 per gallon instead of $3.30? Or is Obama really trying to destroy the country and push his socialistic/communist agenda (my dad’s words, not mine) by making us pay higher prices at the pump?

— Naomi Byrne, Texarkana, Texas

Now, Cecil gives us the Straight Dope:

Cecil replies:

Don’t get thrown off the scent by your old man’s red-baiting, Naomi — he’s the real Bolshevik around here. Controlling prices is what communist central planners did in the old days, and what leftist rabble-rousers like Hugo Chavez of Venezuela do now. Thankfully, there’s little chance of it happening in the U.S. Our last experiment with socialism, during the administration of that well-known Marxist Richard Nixon, was convincing proof that government-dictated price controls don’t work.

In August 1971, hoping to dampen rising inflation, Nixon declared a freeze on wages and prices. Initially the freeze applied to everything, later just oil and gas. World oil prices were fairly stable during this time; not surprisingly, so were gas pump prices. If you weren’t paying much attention, you might think the price freeze had worked.

Then came the real test. On October 6, 1973, Egypt and Syria attacked Israel, igniting the Yom Kippur War. Nixon sent money and supplies to Israel. Partly in retaliation, the Organization of Petroleum Exporting Countries (OPEC) announced a 70 percent increase in the price of oil, and not long after Arab countries declared an embargo on oil exports to the U.S. Oil production was cut 25 percent.

A cease-fire ended major fighting within weeks, but skirmishes continued through the winter, and the Arab states kept up the oil embargo till March. By then world oil prices had risen from $3 a barrel to $12. Amid calls for rationing, worried U.S. consumers formed long lines at gas stations; some operators ran out.

What effect did the Nixon price controls have on all of this? Not much. The pump price of a gallon of gas in the U.S. rose from 38 cents in May 1973 to 55 cents a year later — a laughable amount now, but a big jump then. Scholarly analysis of the Nixon controls suggests they had only a trivial impact on gas prices.
Why? The immediate reason is that Nixon’s price controls applied only to U.S. oil production. Domestic petroleum output was then in decline, dropping from 79 percent of U.S. consumption in 1970 to 64 percent by 1975. Even so, roughly two-thirds of the oil we used at the time was produced within our own borders, and a good chunk of that was subject to price controls. Why then did the rising price of foreign oil drive local gas prices so high?

The answer has to do with a basic but often baffling economic concept called marginal cost. The idea is this: in a perfectly competitive market, price is determined by the cost of producing one more unit, in this case a gallon of gas. With U.S. demand greater than U.S. production, then as now, those additional units had to come from expensive foreign oil. Since gas was gas and nobody was willing to pay a price differential depending on where the oil was pumped, the price of all gas went up.

Your father may say: Hold on. If the price of gas is effectively determined by the cost of the most expensive oil used to make it, that means oil companies with access to a lot of cheap domestic product made out like bandits.

You got it, bubba. The Carter administration tried to address this problem with a windfall profits tax. Whatever may be said for the wisdom of that strategy, it had little impact on pump prices.

If you really want to keep the price of gas down, and I mean way down, the only proven solution is to nationalize the oil companies and control the price directly. Hugo Chavez did that, and the price of gas in Venezuela is the lowest in the world, recently under 10 cents a gallon. This may be your father’s idea of paradise. It’s also socialism, and we’re not talking about the current right-wing nutcake idea of socialism, meaning anything Obama does, but actual socialism.

Happily for us, and I say this without sarcasm, we don’t have socialism in this country, we have the free market. When gas prices are high, the market is telling us a lot of people are competing for a scarce resource. If you don’t feel like spending so much and don’t want to move to Venezuela, your only choice is to quit whining and figure out some way to use less.

— Cecil Adams

NEW: THE STRAIGHT DOPE PODCAST! No time for retro print technology? Listen to the Straight Dope while you multitask! Launch iTunes, then search for “Straight Dope” in the iTunes Store. Click on “subscribe” and Cecil’s latest installment of wisdom will be automatically delivered each week.

Hope you were enlightened and entertained :)

Filed under:Fuel cost,Fuel Cost Control,Gas price | by Pump Girl @ 1:21 pm | 

October 23, 2012

Update on Rapid Drops in Price of Gas

 

Yesterday we reported that gas prices around the nation were set to drop rapidly as the winter quickly approached. Today’s trading only intensified this shift to lower prices. According to the Associated Press:

“Benchmark oil dropped $2.32, or 2.6 percent, to $86.29 in afternoon trading in New York. It’s lost about 6 percent in the past three trading sessions.

That’s starting to mean more relief at the gas pump for U.S. drivers. The national average for a gallon of regular gasoline dropped 2 cents overnight to $3.65. The price has fallen 17 cents in the past 12 days.”

A variety of factors on both the demand and supply sides of the market are contributing to this drastic drop in price. The debt crisis in Europe depressed worldwide demand while US stockpiles reached the highest levels in months. If these trends continue, as they are expected to, it is likely that Americans will experience an extra thirty cent price drop by Thanksgiving.

Filed under:Causes and Solutions,Energy,Fuel cost,Fuel Price Trends,Gas price | by Eyes on Energy @ 10:21 pm |