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

What’s with that? Peter Cohan of BloggingStocks.com tries to answer his wife’s good question. We know we paid almost $2/gal (Chicago burbs) just last week as oil reached one of its lowest prices in recent times.

He comments on the situation in CA, but it probably extends throughout the country. Cohan suggests less supply because refiners shut down for maintenance this time of the year. Plus a BP plant in Carson had mechanical problems.

So, supply down, demand the same, price heads up. When the refineries ramp up again, we should get a little price relief.

Cohan says experts predict $2.50 gas this summer.

The Oil Drum suggested to staff that some might want to write some advice to President Obama about his energy policy.

From Gail the Actuary, “An Actuary’s Impractical Perspective.”

It seems to me that several steps come before energy policy: we need to get the worst of our financial problems behind us and we need to understand where we are, before we can make intelligent decisions going forward. Also, the issues are really broader than energy policy–they include agriculture, education, commerce, and a broad range of other areas affected by reduced energy supplies.

In this post, I offer a few ideas regarding what needs to be done. My ideas not chosen from a point of view of what is practical; instead, they are chosen based on what logically needs to be done, regardless of the practicality. Also, these ideas assume a fairly high level of understanding, and a desire to implement the best long-term solution, without consideration of the politics involved. In the real world, I doubt that these ideas have much chance of being implemented.

1. Put our financial problems behind us.

2. Set a floor for energy prices.

3. Start adopting practices that flatten wages between management and rank-and-file workers

4. Make an honest assessment of what energy availability is likely to be in 10, 20,50, 100 yrs.

5. Put together a number of alternative infrastructure spending plans & eveluate them.

6. Make an honest assessment of how the minimum needs of the population can be met.

7. If there is a chance that a downgrade in lifestyles will be needed in 20 yrs., start teaching now.

8. Start thinking durable, flexible, and recyclable in everything we build.

Read the whole article for details on these points and more.

Rumors have been flying, that even though Former VP Al Gore said he would not serve in the new administration in any formal capacity, Obama might ask him anyway to fill the role of energy czar.

Some said Gore wouldn’t have burned so much carbon by taking an airplane to meet with Obama in Chicago. Gore quashed the speculation.

This meeting is a continuation of their conversations about climate and energy and how policies to address them can help the economy and jobs,” said Gore spokeswoman Kalee Kreider. “Former Vice President Gore still believes his calling at this time is to help educate the public about the issues through his roles at the Alliance at Climate Protection and other work.”

Obama is very serious about energy initiatives, and wants to consult with the best.