The Obama Administration will be pleading its case to the Fifth Circuit appeals court today at 3:00 PM local time. According to Reuters:

The drilling companies have the backing of key local leaders including Louisiana Republican Governor Bobby Jindal and Democratic Senator Mary Landrieu, who have argued the ban should be lifted in part because the drilling industry is worth $3 billion annually to the state’s economy.

The timing could not be much worse for the Gulf coast because the communities were just starting to get back on their feet after the devastating 2005 Hurricanes Katrina and Rita.

But the Obama administration has fired back that the ban was essential given the catastrophe unfolding, as millions of gallons (liters) of oil spew from the well. The administration also said the suspension was narrowly tailored and the Interior Department’s expertise should have carried more weight.

This means, of course, that the ruling we covered on June 23 may not hold up. The obvious consequence here: higher fuel prices for the consumer and tougher profit margins for fleet managers.

Sundance film in theaters now. It’s not pretty.

It could happen. Last week Pres. Obama & key House Dems agreed to include “Cash for Clunkers” in a new major energy bill.

The program would offer federal payments to those who scrapped their gas-guzzlers in favor of more energy efficient rides. Europe has already had success with something like this.

Rep. John D. Dingell (D-Mich.), a longtime champion of the auto industry, said the plan would “result in hundreds of thousands of new vehicles being purchased across the country.”

Eddy Elfenbein at Crossing Wall Street takes on the question.

Apparently, it’s not a conspiracy after all. More likely, the answer is old-fashioned supply and demand.

Tom Waterman of Oil Intel, one of our featured links, sent us a copy of his Feb. 5 story, “Will Refiner’s Struggles Lead to Higher Gasoline Prices?” Ordinarily subscription is required, so we will post in its entirety.

New York, NY After 4th quarter earnings reports confirmed how bad the downturn in the U.S. and European refining sectors has been there is a concerted effort underway to cut costs at every corner.

The real danger looking beyond 2009 is that expansion and upgrading projects are being delayed and in some cases indefinitely postponed.

Already there are questions being asked on Capitol Hill about why retail gasoline prices are rising even as crude oil has fallen so sharply in recent months.

The answer is very simple. Refiners that had been producing gasoline at a loss in the latter part of 2008 have been cutting back on overall utilization as well as deemphasizing gasoline production in favor of more profitable distillates.

Refinery utilization rates in January averaged below 84% for the first time in a very long time. In fact the American Petroleum Institute says that overall in 2008, refinery utilization averaged 84.9%, the lowest rate since 1988. The API also calculates that gasoline demand fell in 2008 compared to the prior year by an unheard of 3.3%. It may be even higher once the Energy Information announces official data sometime in April, 2009, and it marks the first year-over-year decline in gasoline demand since 1991.

With the ethanol mandate requiring 11.1 billion gallons of ethanol blended into gasoline in 2009, one might think that gasoline demand could slip further this year.

That is a possibility but further ‘demand destruction’ will be dictated by how deep the economic recession cuts.

Frankly, efforts underway to lessen the impact of reduced demand for products will alter the supply/demand equation during 2009. Valero, the nation’s largest refiner has already cut back to
about 75% of capacity, and there is no reason to believe that the company will change that pattern unless profit margins improve. Others are certain to follow, which could keep utilization rates at historically low levels.

Naturally there will be some refiners that try to take advantage of improving margins, which are substantially higher this month than at any time since September, 2008, but have a
long way to go to convince refiners to boost overall output.

There will have to be signs that gasoline demand is picking up. Perhaps the first sign came yesterday when the EIA reported that ‘implied demand’ ticked higher by 4.2%, or 365 million bpd.

That number was startling, given the economic mess we’re in right now, but until we see a few weeks of data like this, it’s too early to declare that demand is coming back.

This is not good news for Houston and the greater Gulf Coast region. In Texas alone there are 25 refineries employing thousands of workers, representing more than 25% of U.S. refining capacity.

I feel it’s too early to bury the industry as these cycles can be corrected in one of two ways. Either demand starts to improve again or production is scaled back until they do.

It seems this sector is intent on making certain that margins improve so that it remains at least profitable to operate.

This is a trend we saw as far back as October, and we have no reason to believe it won’t continue. We felt that gasoline would lead the next rally,
and that has been the case.

On November 17, 2008, we wrote: ‘Even as gasoline gets battered again and again, it gets clearer every day that gasoline is going to lead the market higher at some point,
and that could very well be after January 1 when the winter begins to wind down and suddenly depleted gasoline stocks become a concern. When we replace the calendar
at the New Year, spring does not look so far away.’

Suddenly spring does not look far away and we are in the midst of what some refiners tell us is the largest maintenance period we have seen in years.

We just don’t see gasoline production increasing at a rate that we normally see.

We also wrote: ‘However, the near-term issue is that gasoline prices will rise versus crude oil. The chances that gasoline production worldwide will slow are greater than OPEC’s
ability to shave crude production, therefore it makes sense that there will be more than enough feedstock but as refiners cut back on gasoline production,
tightness could develop in the U.S. and elsewhere.’

On November 17, 2008, NYMEX prompt WTI settled at $54.95 per barrel while RBOB gasoline settled at $1.1746 per gallon, or the equivalent of $49.33 per barrel, 10.2% under the value of crude oil.

Yesterday, WTI settled at $40.32 per barrel compared to RBOB, which settled at $1.2184 per gallon, or the equivalent of $51.17 per barrel, 26.9% above crude oil.

Since then, crude oil has fallen by 26.6% while gasoline has gained 3.7%. We see this trend continuing as spring approaches.

Tom Waterman
Publisher
www.oilintel.com