The Oil Drum

39 comments on Another picture that tells a story

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Jack on September 27, 2005 - 1:21pm

Sealth: Refineries respond to the economic incentives every year and shift production to distillates for heating oil during the fall. This year, they will do the same thing. The only difference is that the prices will be higher for both heating oil and gasoline. Demand for each determines the level of production and price for each. There is no reason to think that heating oil is less profitable than gasoline.

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fatbear on September 27, 2005 - 1:30pm

There is no reason to think that heating oil is less profitable than gasoline. Yep, he's right - for instance at 12:19 today, NYMEX

Jan Heating Oil - 2.1160

Jan Gasoline - 1.9500

seems to be some money in Heating Oil....

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Sealth on September 27, 2005 - 1:35pm

Yes, but if prices are high enough that demand destruction (a euphemism for "the poor can do without") is occuring in both gasoline and heating oil (a distinct possibility this year), then not enough heating oil will be produced to allow everybody to adequately heat their homes; thus, the rich will continue to drive SUVs while the poor freeze to death.

In another part of this thread, somebody pointed out that Congress could dictate to refineries that they have to produce enough heating oil to supply all residential heating requirements for the winter, even if it cuts into their bottom line (because the rich are willing to pay more for gasoline than the poor are able to pay for heating oil). My question is whether or not Congress will be able to muster the political will to do so (after fending off accusations of being communists) in time to really make a difference this winter.

This all may be moot because we are not currently short, and with any luck (and perhaps a mild winter) we can avoid a heating crisis this year.

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Jack on September 27, 2005 - 3:15pm

If heating oil prices stay anywhere near the level cited by Fatbear, refineries will shift as much of their production as possible to take advantage of the it. Heatng oil prices higher than gasoline mean great margins for refiners. However, their equipment will be the main constraint on how far they can go. With a given set of refining equipment, there is a fixed range of gasoline/distillate production levels. The government can't order refineries to produce more than they can. However, you are right that the poor may not be able to bear the increased costs created by a product shortfall.