More demand, less capacity

We’ve evidence this week that fuel prices can drop just on a rumor.  “Amid rumors that the US and UK would dip into their strategic reserves, the price per barrel dropped $2 a barrel overnight.”

While the Obama administration is deliberately blocking our internal production, even the rumor of a change in policy can dramatically affect the price per barrel of crude. 

Instead of looking toward regaining the stability of our supply in a dangerous world, our government is doing the opposite.

“…we are the only major nation to deliberately limit domestic oil production even as war clouds and unstable governments place foreign sources in jeopardy.” — Investor’s Business Daily.

Now we have information that two major east coast refineries may soon close.

Half the refining capacity on the populous US east coast is set to disappear. Sunoco has pulled the plug on two refineries already and warns that another in Philadelphia will close in July if no buyer steps forward.– UK Financial Times.

What we’re seeing is that even if the US opens exploration and drilling, we won’t have the capacity to refine that additional oil.  The lack of refining capacity will be as serious a situation as the lack of oil to be refined.  The refineries are being squeezed between the increasing delivery cost of the basic product, lowered demand due to the higher costs of that product—gasoline and diesel fuel, and NIMBYs and liberal environmentalists anxious to close the refineries and block the construction of new, more efficient replacements.

In short, it’s a negative feedback loop. Lower usage, higher costs means refineries can’t meet minimum margins and are closed.

We applaud when we hear, “Drill baby, drill!”  We will not meet our fuel requirements if there are no refineries to process that oil.

Updated: Have you noticed the gas prices lately?

Update (November 18, 6:30pm CST): My wife returned home an hour ago and reported that the price for unleaded regular has broken the $3 level—$2.999 at two separate stations.  I can’t remember how long it has been since prices were that low.

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I made a few comments at a couple of internet sites this week that my local gas prices are approaching the $3 line.  Coming down towards that line, that is.  Earlier this week, unleaded regular at my neighborhood gas station was $3.049/gallon.  Yesterday it dropped to $3.029/gallon.  Some of my neighbors wonder if the price will drop through the $3 line before Thanksgiving.  (Everyone expects the price to rise on or just before Thanksgiving although I remember that has not always happened in the past.)

At the same time, I read on Drudge and other sites that the price of Brent crude rose above $100/barrel during trading. How can our local pump price drop while the world crude price rises?  

US and Canadian domestic crude production. 

There is a glut of US and Canadian crude that has offset the price of international crude. That glut is stored in a place call Cushing, OK.

Greg Knapp, a local radio host, interviewed an oil industry analysis, Loren Steffy of the Houston Chronicle.  That interview is available via MP3 here.

Steffy noted that US refineries are working to utilize this domestic supply. At the moment, they’re set up to use imported oil via tankers.  When pipelines can be redirected to accept oil from the Cushing Tank Farm, there will be an immediate impact on the availability of oil.  We will be less vulnerable to variances of overseas oil supply—like the recent  and ongoing civil wars in Libya and Nigeria.

Steffy does not expect the current low gas prices to last.  They, like all commodities, are subject to the law of supply and demand.  At the moment we have more supply that we have demand and that is driving the gasoline prices down.

The trend, however, is towards equalization.  If we have a glut, we will sell that glut either here in the US or overseas.  There is demand for our product as seen in the revitalization of the Dakota oil fields and the central western states of Colorado and Wyoming.

The bottom line is to enjoy these low prices while they last.  The US industry could manage these prices to all our benefit if—we can get rid of the opposition of the bureaucrats in Washington and their liberal political supporters.

I urge you to listen to the MP3 interview linked above.  It will be an education.