I've gotten a number of questions lately on broadly ranging economic topics, with a significant focus on everything on Wall Street, such as Barclays' purchase of Lehman assets, and the government "bailout" of AIG, but one area I thought merited a bit of discussion is the current oil / gasoline price relationship.
In the market for oil, just like Fed rates and mortgage rates move separately, so do prices of crude oil and finished petroleum products, like gasoline and heating oil. At present, there is no shortage of crude oil; last week there was some concern that Gulf production of crude might be interrupted by Ike, but as further information has become available, it turns out that the oil wells will be able to get back online very quickly.
The refineries, however, will be out of commission significantly longer. They depend on onshore electrical power to be able to operate, and at present, there are still millions of people without power in Texas, not to mention the thousands of businesses supplied by the same grid.
Another problem with gasoline will also have an impact. Unlike crude oil, which is relatively stable, gasoline is a very volatile chemical, prone to ignite on almost any prompting. Because of this, refineries produce less when less is used. Well, US consumption of gasoline has been much lower recently, so refineries had actually significantly slowed production long before the arrival of Hurricane Ike. As a result, inventories of finished gasoline were already low going into the storm.
What does this mean? The economic laws of Supply and Demand define how this market works:
Pumps supply oil that is demanded by refineries. Refineries are closed, so they demand less oil. Lower demand with constant supply leads to lower prices.
Refineries supply finished products that are demanded by us. Refineries are closed, so supply less. Lower supply with constant demand should actually lead to higher prices. Good thing they're staying the same, for the moment.
According to one article linked above, it is likely we may see $4 per gallon gas again in the near future, even as crude oil prices continue to decline. Of course, I wouldn't be surprised to see a bounce in crude prices tomorrow, but only time will tell. In the meantime, it's a good idea to keep the tank full.
Comments(5)