I have a colleague at work who confidently predicted yesterday that Oil prices would spike to $80 per barrel, then come down soon.  His reasoning?  The inflated price is ALL due to an Iran-fear induced bubble.  Of course, he doesn't know what the hell he is talking about, but one doesn't want to be impolite....

Item (c) is important.  There can be a decoupling between gas prices and oil if refineries cannot meet gasoline demand even if oil is available.

If true, then it is well within the reach of grandstanding politicians.  After all, this says that the price of gas selling now has little to do with how much it actually cost to produce it.  You've just used fancy words for what is price gouging to the public.

A Primer on Gasoline Pricing

That article probably has gotten more hits than anything else I have written. Nobody who responded in the comments disputed my arguments. It is very similar to the MSNBC piece (which everyone should read), but not as comprehensive.

In short, gasoline prices right now are being affected by falling inventories. Oil prices, which of course affect gas prices as well, are being affected by tightness in supply and demand, fear, and speculation. But brimming crude oil inventories suggest that the forces affecting oil prices are not exactly the same as the forces affecting gasoline prices. If we see oil inventories fall dramatically for 7 weeks in a row, and much more steeply than forecast, then we will have $100 oil in 7 weeks.

RR  

According to Barbara Meyer-Bukow of the Mineralölwirtschaftsverband (MWV - call it the oil sellers in short), consumption fell more than expected last year. Gasoline sales (Benzinabsatz - a bit tricky, but in this case, I would bet on them measuring sales in liters, not euros) fell 6.3% in the first quarter. And according to the article (without quoting sourcing), German refineries were more than 99% utilized (ausgelastet), and posted good/excellent earnings.

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From another poster, alistairC (http://www.theoildrum.com/user/alistairC) -

OK so I've looked up some numbers for France:

Overall cost of energy increased 35% in 2005
Consumption of "essence" (=gasoline = benzin) down 6%
Consumption of diesel up 0.9%
Biofuels up 18% (off a very low base)
3% decline in private vehicle kilometers
1% decline in overall vehicle fuel sales

-----------------------------------------

What is interesting is to see how flexible German and French  gasoline sales seem to be in comparison to what one reads coming form the U.S. Even more interesting, if German sales actually declined 6.3%, and German refineries are essentially running non-stop, I would guess that Germany / Europe is currently able to deal with rising crude costs a touch better, as they then turn around and sell the U.S. higher valued products, thus earning a small 'discount' in their total energy bills.

In my opinion, peak is here, and America seems to be about at the level of preparation which one would expect from a society which seems to be ruled by the idea that the market (or prayer) is the most powerful force in human affairs. How much have gasoline sales in terms of volume declined due to higher prices there? Of course, you can also see Jevon's paradox at work in the real world - conceptually, all of the 'excess' German gasoline / French was consumed by others who could pay for it.

But then, can the U.S. really afford to pay? At least in Germany and France, the price is too high, and people shift their behavior. Gas prices are not an obsession in conversation here, though the basic opinion at where I work is that the prices rises are essentially due to gouging, and American ineptness and stupidity in the Middle East.

The particular problem we face today is a shortage of ethanol. The reason this additive is needed is because of government regulations. The problem is that the switchover to ethanol was mandated before the production capacity was in place to meet the required demand.

This could have and should have been anticipated. It is no secret how much gasoline would be produced this month. It is no secret how much ethanol would be available. A shortage of ethanol was perfectly predictable (and was, in fact, predicted by many observers). The consequences are equally predictable and we are facing them today: spot shortages and extremely high prices. Gas hit over $4/gallon in my town today for full-service premium.

Government regulation is responsible for this problem and government could have prevented it. They should have phased in the rollover to ethanol over a longer period to make sure that production capacity would be in place. By mandating a sudden transition, government set us up for the situation we are in today.

Of course the last thing they want is to be held responsible, which is why we see all this posturing about profiteering and Chinese demand. Yes, high worldwide demand is an issue and would flow into high gasoline prices eventually. But the sudden and immediate problem we are facing today is due to government regulation. This is one cace where the finger of blame is very easy to point. Government should be held accountable for this fiasco.

http://www.cnn.com/2006/US/04/21/feedback.gasprices/index.html?section=cnn_topstories

The reason why demand is so damn inelastic is becuse oil is so necessary for our economic system, from aviation to commuting to pharmiceuticals to seemingly cubic zirconium production. Oil is needed EVERYWHERE in our economy. Without oil, we would still be in the trees swinging around like fur-free apes. (once we lose resources needed for clothing, we will re-evolve to have fur again!)

So, when political panderers start to complain about price gouging, perhaps they should have it pointed out that they are the biggest "gougers" of all.

RR

I guess I am going to have to start going to the gas station across the street.

Gas prices are changing my behavior.  I had a lot of stuff to do, and it was pouring rain.  Ordinarily I would have just gone grocery shopping and done the other stuff another day, but I did everything this morning, to save on gas.  Even though the farthest I went from home was three miles, I didn't want to drive it twice if I didn't have to.  

Though running all my errands at once caused problems of its own.  I'm still not used to how small my new car is, and ended up with stuff on the back and front seat as well as in the trunk.  And the poor little Corolla was definitely straining under load.

Fears of gas shortage lining many pockets

Hitching a 2-percent price increase in 12 hours to "fear of a supply disruption" is as preposterous as it is asinine.

If the disruption doesn't happen, will prices reduce to compensate for the overcharge? We doubt it.

Truth is, come June 1 the gas corporations have a ready made excuse waiting for them - the beginning of Hurricane season. They're just riding the threat of an impending disruption of service for six weeks until they can find a better excuse to gouge us.

Governments may be stockpiling covertly, ready for the coming war

any thoughts??

The effect of rising gasoline prices shouldn't be viewed in isolation, said Carol Clements, chair of the National Fuels Fund Network, which provides emergency financial assistance to poor families that cannot pay their electricity or home-heating bills. "All of these energy costs are having a compounding effect," she said. "We're seeing more people bumped from middle and working class to low-income and poverty situations."

Corporate America has noticed, and is responding:

Wal-Mart Stores Inc., the nation's largest retailer, warned earlier this week that it expected reduced sales throughout 2006 from its least wealthy customers, and the company highlighted its strategy to market more higher-end goods to maintain growth. And after reporting a $92 million first-quarter loss, AMR Corp.'s American Airlines, the country's largest carrier, said it would mothball 27 of its most inefficient aircraft.

The big squeeze

Back in 2001 when petrol was 80¢ a litre, it made sense for Hills Industries to consolidate its water tank production in one large factory and ship the containers around the country. But soaring transport bills have compelled the Adelaide-based electronics and household goods group to build satellite factories in different states to cut costs.

"You wouldn't have to be a genius to work out the distribution costs for shipping water tanks around Australia. It was going to kill us," said David Simmons, Hills chief executive.

"So we are going to get closer to the market, with satellite tank plants in Queensland, NSW and Victoria. The whole trucking industry has applied an oil-price surcharge because no one knows whether it is permanent or a blip."

Many smaller producers lack the scale to make similar savings, and instead have to either absorb costs or lift prices.

In Melbourne, 18-month-old business Emma And Tom's, which produces boutique bottled juices, is hit on almost every level by higher oil prices.

"The price of fruit has risen, as their freight costs have gone up," said director Emma Welsh. "Then our freight costs go up and then there's our sales reps and all their petrol costs.

"The cost of plastic bottles has also grown, but that's been outweighed by a growth in sales ... every time you turn around your suppliers' fuel levies go up."

Chevron and Kuwait join line of European refineries up for sale

Nerefco is one of Europe's largest and most modern plants, with the capacity to process 400,000 barrels of crude oil per day, and Chevron's stake is expected to be worth more than $650m. The Europoort refinery is far smaller, processing 40,000 barrels per day, and will be worth closer to $320m.

A banker said: "Refineries are going for pretty ridiculous numbers at the moment. It's been an industry that's been very static in Europe."

a) Refinery prices are very high, and new refining capacity will eventually reduce profitability and hence prices.

or:

b) There won't be enough oil to process in a few years, so sell now.

I'm surprised I haven't seen anyone comment on it yet (sorry if someone has) because it is very supportive of RR's thesis that the current gas price increase is due to refining capacity issues, not a peak in global oil production.  In fact, Verleger argues that high gasoline prices in North America will cause $100/barrel oil prices, not the other way around.  He argues that refining constraints come from three sources:  long term lack of investment in the US industry coupled with rising fuel standards that block foreign producers from selling into our market, delayed effects of hurricanes Katrina and Rita in which much routine maintenance was delayed until this Spring and because 5% of our refining capacity still hasn't been returned to service, and trouble meeting new low sulfur diesel and no MTBE rules.  Verleger is looking awfully prophetic given that his article appears to have been written before the start of this year.

I skimmed the article this morning and didn't see a direct mention of peak oil, or the shift in supply from light sweet crude to heavy sour curde, supply risk due to geopolitical instability etc.  So if Verleger is largely correct in his thinking we should consider the current run up in gasoline prices, higher inflation and the associated risk of recession a dry run for the real thing when more severe bottlenecks come to the fore.

==AC

From the mouth of the sell-out himself;

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value. If there were, the government would have to make its holding illegal, as was done in the case of gold. If everyone decided, for example, to convert all his bank deposits to silver or copper or any other good, and thereafter declined to accept checks as payment for goods, bank deposits would lose their purchasing power and government-created bank credit would be worthless as a claim on goods. The financial policy of the welfare state requires that there be no way for the owners of wealth to protect themselves.
This is the shabby secret of the welfare statists' tirades against gold. Deficit spending is simply a scheme for the "hidden" confiscation of wealth. Gold stands in the way of this insidious process. It stands as a protector of property rights. If one grasps this, one has no difficulty in understanding the statists' antagonism toward the gold standard."
~Alan Greenspan - 1967 "Capitalism, the Unknown Ideal"

They just did a segment about New Yorkers who drive for miles out of their way to buy cheaper gas in New Jersey.  

This chart is the first of two I finished about a week ago. I'll post the second in a while, after I update it. The two are the same, but I change the focus in the second and need to  remove some lines, so it is important to understand the first.

The spikey lines, red at the top and blue at the bottom are the weekly average retail and wholesale gasoline prices in the United States since January 2005.

What I am ultimately trying to do is to see what the normal correlation between these two prices is and then look for discrepancies.

The smoothed pink and purple lines running through the red and blue are trailing 4-week averages. I then shifted the purple line one week forward. I did this because I wanted to be comparing wholesale prices to their retail counterparts "next" week, allowing for any lag.

Lastly, I wanted to place these two lines on top of each other. I did this by finding the average price difference between January and August. This number started as about 65 cents, but moved to 68 cents when the EIA revised their numbers. I then added 68 cents to the purple line, raising it to become what I believe is another shade of blue.

I have then highlighted the gap in between these two lines in yellow where it was greater than normal. Please excuse the quality of the image, the yellow didn't work out the way I was hoping.

If you do the math on those yellow areas that is where you will find any excess profits at the retail level if any exist.

Answer:  Speculation.  The hedge funds and the Jimmy Rogers of the world have discovered that the Murkan way of life is truly non-negotiable.  Murkans are willing to pay any amount of money to fill their gas tanks.  Great!  Speculators buy more calls and bid the price up even higher.

This isn't terribly complicated to understand.  When speculators find anything, gold, copper, oil or whatever, that can be bid up without causing demand to fall or supply to increase, they buy it and drive the price up.  That's what speculators do.

Is it gouging?  You bet!  But the usual suspects, the oil companies, aren't the villains.  At least not directly though I'd expect they have people in their financial units engaged in buying up speculative oil contracts.

Right now speculators are betting that demand for oil is going to outstrip supply at the current price.  This has nothing to do with the "peak-oil" meme.  They don't care about buzzwords.  They care about what price the market will bear for a given commodity.  Right now they are essentially arbitraging what they see as a discrepancy between the current price of oil and its true value.  True value in this case represents what the Murkan motorist will pay.

Oil went from $3 a barrel in 1969 to $30 a barrel in 1980.  The economy survived with a few bumps and grinds along the way.  I think cool-headed speculators are now thinking $150 a barrel oil is not far-fetched based on what the economy has already survived.

What's the endgame?  Recession of course.  That's painfully obvious.  Until then speculators will continue buying calls on future supplies to force the price ever higher.  The leverage is immense and the profits are astronomical.  It's pretty clear there aren't any significant new sources to be brought online quickly at a given price point.  It's also pretty clear that the exurban commuters can't make a quick transition to car-pooling.

A recession may or may not be a bad thing.  Recessions are nasty but something has to give us smackdown or we're really screwed.  In a way it's the free market method of raising taxes on oil.  I'd rather see Jimmy Rogers get the money than BushCo.  Not that either will use that money to steer us in a better direction.

Right now the free market force of speculation is forcing the Murkan drivers to change their ways or go broke.  I'd bet on the latter.

The market-hating, bureaucracy loving, dumbocrats have found their wedge issue.  By punishing the oil companies they will accomplish the worst of all worlds - not untypically.

The EPA is offering a research grant opportunity that I believe is a perfect fit for this idea.  I have sent an e-mail to a hand picked list of university professors who have experience with government research projects.  I'm looking to form a research team to apply for the EPA grant, conduct a social-economic experiment and surveys to determine to what extent the American public will support it, project the economic potential of WPH, and identify logistical, social and political obstacles as well as opportunities.

All government grants are awarded based on merit of the proposed research.  I believe WPH has merit but your help is needed to verify it. You can help by posting your feedback.  Let the professors and the EPA know what you think about WPH.  Do you think this idea is worth pursuing? We need to know if Americans will support a plan like this.

Do you have any ideas to improve the plan?

Share any and all of your thoughts.

Tell your friends and family about this Blog post and ask them to post their thoughts on WPH

http://wepayhalf.org

Thank you

Craig