8-13-08 by dugan
The price of crude oil went up about $4 a barrel today not for any lack of oil, but because U.S. companies are cutting back on refining gasoline. The cutbacks are business decisions. No fires, hurricanes or unexpected breakdowns–just a desire to keep the price of gasoline from dropping. The resulting $4 rise in crude oil shows the ping-pong relationship between the two prices. It isn’t logical, in the sense that the price of leather doesn’t rise when Blahniks go up $50 a pair. But oil and refining are a concentrated, uncompetitive markets that live by their own rules.
U.S. refineries are using only about 85% of their manufacturing capacity, according to the latest Energy Information Administration figures. That utilization, for the year, is at a 17-year low. It’s like a farmer letting his apple crop rot on the tree rather than sell at a lower price. If demand for gasoline falls, refiners cut their "manufacturing" to keep more profit on fewer sales. The fact that U.S. supplies of gasoline only amount to about 21 days of consumption, instead of the 30 days that were standard up until the mid-1990s, makes prices even more volatile.
The refinery cutbacks are also the reason that the price of gasoline has fallen only a fraction of the drop in the price of oil. Historically, oil companies were willing to make little or no profit on refining when the price of oil was high and pouring profits into the other end of the business. Now, the practice is to keep cutting production instead of fighting for market share. And that’s what produces the reverse price effect, with gasoline pushing oil instead of the other way around.