Monday, 05 July 2010


“Cheap” gas, part 1

A couple of days back, Insty linked a Popular Mechanics story, “Why Is Gas so Cheap Right Now?”

In the week running up to the July 4th weekend, the average price of a regular gallon of gas is $2.75.  The cost of fuel has been on a steady downward slope since May, when the average price was nearly three bucks a gallon.  And if we adjust the price of fuel for inflation, the cost of gas is as cheap as it was five years ago...
The story’s author fumbles for an answer (he cites Paul Krugman, fercryinoutloud), but finally attributes the U.S.’ “low” prices to the current foreign exchange rates:
It has to do with the relative value of the world's currencies, specifically, the euro versus the dollar.  The euro is tied to a host of European nations and, as you have probably heard, some of those countries are in a bit of a debt crisis, and that has led to the value of the euro falling in relation to the dollar.  Crude-oil prices are tied to the dollar so, in simple terms, our stronger currency is simply buying more oil than before.
Well, maybe.  The Euro’s July 2 interbank middle rate was .7968/$, down from .8074/$ on June 25, and down 14% from the first of the year.[1]  But this explanation strikes me as incomplete.  And it specifically fails to account for the lack of volatility of the price at the pump over the last few months.

Because not only has the pump price not increased, it has also been remarkably stable in the face of the sort of external events that used to set it wildly gyrating.  Consider...

We’ve heard rumblings from the middle east (Iran threatens nuclear war on Israel, Turkey (and Iran) stirs up the Palestinians, various “informed sources” raise the possibility of Israel preemptively nuking Iran, etc., etc.).  The oil market? “Ho, hum.”

Then there’s BP’s debacle in the Gulf of Mexico, topped with the president’s on-again-off-again-on-again drilling moratorium.  Reaction? “Z-z-z-z-z-z.”
$2.559/gallon gas in South Carolina on June 30th
In the past, either would have instantly rocketed the price above $3.00 per gallon.

And finally, we’ve seen two holiday weekends go by- Memorial Day and now July 4th- without the typical 5-10¢ “just because we know you’ll need to buy gas this weekend” price blip.  (Particularly noticable to me during last month’s Memorial Weekend trip to South Carolina.)

Meanwhile, what’s been happening upstream?
Oil fell for a fifth straight day Friday...

Crude prices in New York and London settled down about 1%...  On a weekly basis, oil prices were down about 9%.  In the second quarter [April-June], they fell almost 10%.[2]
Can you say “Summer driving season”?  Apparently not this year.

So what’s my explanation?  Simple: Supply and demand.

Gas today in Indianapolis: $2.699.Supply:   I’m prepared to bet that there is more oil floating around out there (ha-ha!) than was typical when we had an expanding world economy.  A lot more.  Enough more that the folks who make their living betting on oil futures aren’t ready to bet that even a months-long shortage would drive the prices up.

Demand:   I’m also prepared to bet that the United States economy is in considerably worse shape than we’re being told, and possibly in even worse shape than the pessimists are saying.  Unemployed people don’t have to drive (as much).  Businesses which are cutting back don’t require as many deliveries. Manufacturing cutbacks reduce the demand for petroleum feedstocks.  All of which pressure prices downward.

Mix them both and presto, we wind up with “unexpectedly” low(er) gasoline prices.  Well, enjoy ’em, if you can pay ’em.

And appreciate the irony:  The mess brought on by our government’s lousy economic policies is shielding it from the consequences of its lousier energy policies.  For the moment, anyway.  After all, there’s always cap-and-trade!

LATER (100707): MaxedOutMama posts an interesting chart of U.S. gasoline deliveries:  1985 levels!

[1]  source: Reuters, via The Wall Street Journal: “World Value of the Dollar,” July 3-4, 2010, Page B6.

[2]  source: Reuters, via Investor’s Business Daily: “CRB Suffers Big Loss For the Week as Tumbling Crude Weighs On Index,” July 6, 2010, Page B16.

Posted by: Old Grouch in Rants at 18:01:31 GMT | No Comments | Add Comment
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