Comments on: The markets for oil and gas can differ

By: Bruce Moomaw

Bruce Moomaw — Sun, 03 Aug 2008 09:31:35 +0000

So: if it's construction of additional refineries that has a real chance of quickly lowering current gas prices, then why are Bush and McCain endlessly emphasizing ANWR and offshore drilling instead as the way to do so?

And since -- after those new refineries have eaten up all our current inventories of stored crude oil -- gas prices will rise right back to about their current level, and increased ANWR and offshore drilling will then raise our supply of crude and thus re-lower our gas prices only slowly, is there not a good possibility that other technological measures (such as the construction of steadily higher-mileage cars and the expansion of railways) will actually work faster and more cheaply (including lower pollution costs and, in the case of railways, a longer useful infrastructure lifetime) than such drilling will?

By: Steve Plunk

Steve Plunk — Wed, 30 Jul 2008 15:32:19 +0000

Spencer, I understand your point but how do we explain the jump in crude prices when a refinery has a fire and shuts down? With less refining capacity the price of crude should drop but instead shoots up.

kbanaian, in the last couple of years I have seen diesel fuel go from the least expensive motor fuel to the most expensive. Current retail differential locally is 60 cents per gallon higher than unleaded gas. Is this purely demand driven or do you think the less elastic demand curve for diesel has an effect?

Scott Swank, I think additional refining capacity could stop the swings in price from seasonal shutdowns, accidental shutdowns, and reformulation periods that refineries go through. Additional refineries could be located to minimize transport costs of refined products as well.

By: Wayne

Wayne — Wed, 30 Jul 2008 15:31:50 +0000

Causing a bottleneck by limiting refinery capacity won’t work. One other countries demand will still be rising. Two if demand for refine products exceeds supply either the price for refine price will skyrocket or more likely we will import refined products. This would results in large profits for overseas refineries.

Yes the price of crude doesn’t necessarily have a direct ratio to the price of the refine product. However since the profit margins are so small the ratios has been close. I haven’t look up the raw data on that but I’m sure it is out there.

By: kbanaian

kbanaian — Wed, 30 Jul 2008 14:53:37 +0000

spencer, I'm talking about the price of gas, not oil.

By: Scott Swank

Scott Swank — Wed, 30 Jul 2008 14:40:17 +0000

peterh,

You missed my point. I'm not saying that peak oil caused the $140/barrel prices for crude, nor the $4.xx/gallon for gasoline. Greater refining capacity could help even out some swings in prices. However, if we are not by and large going to need more refining capacity than we currently have, then building more refineries is a money losing proposition. I am suggesting that investors are not interested in putting their money into refineries.

Additionally, as the price of oil goes up consumers and make different medium term decisions (fewer SUVs) which causes the demand to become more elastic than it is in the short term. This further diminishes our need for more refining capacity.

By: spencer

spencer — Wed, 30 Jul 2008 14:28:22 +0000

Crude oil is an intermediate product in there is no final demand for crude, only for refined product.

So demand for oil is partially a function of refining capacity. If refining capacity is down demand will be down and if refining capacity expands demand for crude can expand.

So limited refinery growth keeps demand for crude oil weak and the cost of refining oil is only an extremely small share of the cost of gasoline.

So explain to me again how expanding crude refinery capacity leads to lower oil prices.

By: peterh

peterh — Wed, 30 Jul 2008 05:41:15 +0000

Yes….I’ll agree…you’re no expert and you “are” guessing….”peak oil” makes for nice sound-bytes as the price for oil rises, but in reality, is not even on the radar screen on reasons why WTI traded beyond the $140 level…..crude is not short…..quality maybe….quantity….no….but…I’m only scratching the surface on many factors involved on the upside and the current downside….Don’t take it as a rebuke.....I lack tack…..

By: Scott Swank

Scott Swank — Wed, 30 Jul 2008 04:55:27 +0000

While there is nothing like agreement on the topic, a reasonable number of experts suspect that we are at or at least near peak world-wide oil production. If in fact we are simply never going to get much more oil out of the ground per year than we currently are, then building more oil refineries is a money losing proposition. My guess is that this is why we have not had any new refineries in the last some years.

But then I'm no expert _and_ I'm guessing...