Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Best AI Tech Stocks ETF and Investment Trusts - 19th Oct 21
Gold Mining Stocks: Will Investors Dump the Laggards? - 19th Oct 21
The Most Exciting Medical Breakthrough Of The Decade? - 19th Oct 21
Prices Rising as New Dangers Point to Hard Assets - 19th Oct 21
It’s not just Copper; GYX indicated cyclical the whole time - 19th Oct 21
Chinese Tech Stocks CCP Paranoia, VIES - Variable Interest Entities - 19th Oct 21
Inflation Peaked Again, Right? - 19th Oct 21
Gold Stocks Bouncing Hard - 19th Oct 21
Stock Market New Intermediate Bottom Forming? - 19th Oct 21
Beware, Gold Bulls — That’s the Beginning of the End - 18th Oct 21
Gold Price Flag Suggests A Big Rally May Start Soon - 18th Oct 21
Inflation Or Deflation – End Result Is Still Depression - 18th Oct 21
A.I. Breakthrough Could Disrupt the $11 Trillion Medical Sector - 18th Oct 21
US Economy and Stock Market Addicted to Deficit Spending - 17th Oct 21
The Gold Price And Inflation - 17th Oct 21
Went Long the Crude Oil? Beware of the Headwinds Ahead… - 17th Oct 21
Watch These Next-gen Cloud Computing Stocks - 17th Oct 21
Overclockers UK Custom Built PC 1 YEAR Use Review Verdict - Does it Still Work? - 16th Oct 21
Altonville Mine Tours Maze at Alton Towers Scarefest 2021 - 16th Oct 21
How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
The Only way to Crush Inflation (not stocks) - 14th Oct 21
Why "Losses Are the Norm" in the Stock Market - 14th Oct 21
Sub Species Castle Maze at Alton Towers Scarefest 2021 - 14th Oct 21
Which Wallet is Best for Storing NFTs? - 14th Oct 21
Ailing UK Pound Has Global Effects - 14th Oct 21
How to Get 6 Years Life Out of Your Overclocked PC System, Optimum GPU, CPU and MB Performance - 13th Oct 21
The Demand Shock of 2022 - 12th Oct 21
4 Reasons Why NFTs Could Be The Future - 12th Oct 21
Crimex Silver: Murder Most Foul - 12th Oct 21
Bitcoin Rockets In Preparation For Liftoff To $100,000 - 12th Oct 21
INTEL Tech Stock to the MOON! INTC 2000 vs 2021 Market Bubble WARNING - 11th Oct 21
AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
Stock Market Wall of Worry Meets NFPs - 11th Oct 21
Stock Market Intermediate Correction Continues - 11th Oct 21
China / US Stock Markets Divergence - 10th Oct 21
Can US Save Taiwan From China? Taiwan Strait Naval Battle - PLA vs 7th Fleet War Game Simulation - 10th Oct 21
Gold Price Outlook: The Inflation Chasm Between Europe and the US - 10th Oct 21
US Real Estate ETFs React To Rising Housing Market Mortgage Interest Rates - 10th Oct 21
US China War over Taiwan Simulation 2021, Invasion Forecast - Who Will Win? - 9th Oct 21
When Will the Fed Taper? - 9th Oct 21
Dancing with Ghouls and Ghosts at Alton Towers Scarefest 2021 - 9th Oct 21
Stock Market FOMO Going into Crash Season - 8th Oct 21
Scan Computers - Custom Build PC 6 Months Later, Reliability, Issues, Quality of Tech Support Review - 8th Oct 21
Gold and Silver: Your Financial Main Battle Tanks - 8th Oct 21
How to handle the “Twin Crises” Evergrande and Debt Ceiling Threatening Stocks - 8th Oct 21
Why a Peak in US Home Prices May Be Approaching - 8th Oct 21
Alton Towers Scarefest is BACK! Post Pandemic Frights Begin, What it's Like to Enter Scarefest 2021 - 8th Oct 21
AJ Bell vs II Interactive Investor - Which Platform is Best for Buying US FAANG Stocks UK Investing - 7th Oct 21
Gold: Evergrande Investors' Savior - 7th Oct 21
Here's What Really Sets Interest Rates (Not Central Banks) - 7th Oct 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Why Gasoline Prices are Surging Again

Commodities / Gas - Petrol Apr 22, 2014 - 07:08 PM GMT

By: Money_Morning

Commodities

Dr. Kent Moors writes: The price of gasoline in the U.S. is on the rise again.

Futures prices for RBOB (“Reformulated Blendstock for Oxygenate Blending”), the NYMEX futures contract for gasoline, are up over 11% for the year and a full 6.6% of that increase has come in the past month.

In fact, gas is up 2.4% over the past week alone. Today, the average retail price is 4 cents higher per gallon than a year ago.


And you can bet that as we move into the “official” start of the summer driving season, the worst is yet to come. Prices will be headed even higher.

So with all the hoopla surrounding our newfound oil wealth and our legitimate move to become energy self-sufficient in as little as a decade, why are gas prices still climbing?

Let me explain…

More Oil Doesn’t Necessarily Mean Lower Prices

But first I need to clear the record about what this new largess in unconventional oil actually means. Then I’ll identify the two primary causes of higher gas prices, along with a third catalyst that is waiting in the wings.

Now it is quite true that the main element in the cost of refined products remains the price of crude oil. However, the reason America became so dependent upon foreign imports in the first place is that they were cheaper.

It was simply less expensive to produce abroad and transport than it was to extract from the declining conventional oil base inside the U.S.

By the time we reached the point where 68% of our daily oil needs were being met by imports, U.S. domestic production was largely coming from mature fields in what was rapidly becoming one of the most expensive places in the world to extract oil.

At the time, over 60% of all daily U.S. production was coming from stripper wells. On average, these wells provide less than 10 barrels of oil a day while bringing up 15 to 20 barrels of water for each barrel of the crude.

Shale and tight oil is now completely changing that dynamic, although there are indications the cost of production is beginning to move up. Nonetheless, the financial attraction of importing has appreciably declined (along with a welcome rise in the security of supply).

By 2025, the U.S. is now projected to have cut its daily import needs by more than half from the highpoint only a few years ago. Only about 30% of that requirement will need to be imported. Additionally, just about all of the volume sourced will be coming in from Canada.

So that should allow us to parlay the new found subsurface wealth into lower overall refiner product prices, right?

Well, in a single word, no.

First, while one side of the trading scale (imports) may be declining, the other (exports) is rising… and fast. Today, American refineries are now leading the world in the export of oil products, especially when it comes to gasoline and diesel.

Now, it’s true. We do have fewer refineries than we had twenty years ago, but the aggregate production capacity has actually improved thanks to technological advances and increases in refining capacity at the remaining plants.

These refineries are also processing a larger cut of crude passing through them, and in many cases have been refurbished to process heavier grades of crude. This latter point becomes especially important with the oil sands product moving down from Canada.

Refinery capacity is stretched but is still within manageable limits.

However, the profitable move these days is for refineries to export product to parts of the world prepared to pay a hefty premium over U.S. consumers. This is not creating in any shortage of gasoline in the U.S., but it does put an upward pressure on prices.

And yes, some pundits are already calling for an “American first” strategy in this case, with the cost as the deciding factor. They are calling for a cut in exports of gasoline – not because we have a dearth of volume available domestically – but because it costs a few cents more a gallon at the pump. But attacks like this on a free market system will always result in remedies that are far worse than the disease.

Second, we are finally starting to see a rise in U.S. demand, matching increases already experienced elsewhere in the world. This global acceleration has been the main reason why exports have become more profitable for American refineries.

The demand improvement itself is a result of two primary factors.

One is an improving economy. The other is that the U.S. is now working through the last vestiges of downward pressures brought on by the recession. Finally, pent up industrial and commercial demand is kicking in, matching the steady improvement in retail consumer usage levels.

But this demand is still not close to the levels experienced before the credit crunch hit. That means there will be additional increases headed our way and further rounds of upward pressures on gasoline prices.

Biting the Bullet on Higher Gas Prices

So we are likely to be flirting with $4 a gallon gasoline again by midsummer. But this time, it’s going to be different. Most Americans are going to bite the bullet and pay it.

The reason is simple: Employment prospects for most people have improved. That wasn’t the case not too long ago.

In late 2008 early 2009, the collapse in the price of gasoline was the result of a significant contraction in economic opportunity. Then, a guy could finally afford to put gas in his SUV but he no longer had a job to drive to.

And what of that third lingering cause?

It’s simple. The rise in domestic crude oil production is outstripping the ability of the infrastructure to store and process it.

That’s why you shouldn’t be surprised if the government begins to approve exports of the oil itself. Currently, that is essentially only allowed for the California heavy crude that does not have a sufficient domestic market.

But, as we have discussed previously, the use of tolling is likely to be phased in. This is the process of providing raw material (in this case crude oil) for processing elsewhere and then importing it back in as a processed product.

This is how the trading cycle, now centered on the export of oil products, will expand to include the export of oil itself. It is also how American refineries will cope with a double whammy -wanting to export but needing to satisfy an expanding domestic market. Refined products imported from one region will then figure in the export of the same products to others.

Refinery margins (the difference between the cost of production and the wholesale price; the actual source of refinery profits) will decide the direction of this trade flow.

In the end, this will support higher gas prices.

But it’s not all bad news. It will also provide a better return for investors in the pivotal refining sector.

Source : http://oilandenergyinvestor.com/2014/04/gasoline-prices-surging/

Money Morning/The Money Map Report

©2014 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in