grimmeissen
Administrator
Join Date: 1/14/2004
Posts: 1217
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Posted: 5/7/2008 12:36:23 PM
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 Anyone who commutes to work by car or is at all involved in the shipping/transportation industries has felt the gasoline squeeze for several months now. We have watched gas prices rise from below $3 to an average of more than $3.60 in less than a year. This sudden surge has caused shipping margins to decrease, has taken extra money out of our pockets, and is finally starting to lower America's appetite for crude oil. We can all see the effects of oil cost on shipping and manufacturing industries, but very few people take the time to view the effects on the oil industry itself.
The current spot price of a barrel of crude oil is currently trading near a record high of $122. Oil explorers and drillers are reaping massive profits, so large that you have some politicians on the left side of the aisle calling for special "windfall taxes" to take a chunk out of the record earnings. While these explorers are doing quite well, the refining side of the industry is vastly different. The current wholesale price for a barrel of gasoline is around $128. If a refiner were to buy a barrel of crude and produce a barrel of gasoline, they would earn a tiny $6 margin.
One year ago a barrel of crude oil was selling around $65 and gasoline was selling for approximately $100. At that time the refiners were earning a decent $35 margin for their gasoline production, a percentage that is closer to historical averages. At the current rates with margins so low, refiners are starting to show signs that making gasoline is no longer profitable. If the demand for fuel does not subside, they will be forced to raise wholesale prices to recover their refining margins.
Let's make a very conservative assumption and say that the refiners need $25 per barrel to cover their costs and make a small profit to produce gasoline. This is quite a bit less than the $35 profit they were making this time last year, and by percentage the numbers are even worse. In order to make the $25 margin, wholesale gasoline would need to rise to $142 per barrel. This would be an increase of almost 11% from current levels. If the wholesale price increases are passed off to consumers at the pump, gasoline prices would be somewhere near $4 per gallon just to sustain current crude costs.
Even using conservative figures we can see that gasoline prices should already be near $4 a gallon with crude trading at $122. The refiners are taking a big profit hit while they wait to see if the rapid rise in crude oil prices will stop. If oil stays where it is for much longer, gasoline will have to rise over $4 just to satisfy the market demand. If oil continues to rise beyond these levels, prepare for gasoline to reach $4.50 or higher this year.
This article is mainly a fundamental analysis of the crude and wholesale gasoline prices. I have done this analysis to help prepare for the inevitable price increases that are coming to the pumps. Beyond preparing for the shocking price increases, it's time that we start looking to the causes of this situation and fighting for a remedy. Crude prices have not risen very much based on supply and demand issues. The underlying forces in the market are the rapid decline of the dollar and the political turmoil in the Middle East. The former is obviously the fault of our government--resulting from massive annual deficits, wasted investments in corn ethanol, and runaway defense spending. The latter is not completely our fault, but we have to take the blame for a good part of it. Our aggressive warmongering stance in the Middle East is obviously a huge part of that turmoil.
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SeekerDarksteel
Corporal Sucka
Join Date: 10/11/2005
Posts: 25
Location: Champaign-Urbana
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grimmeissen
Administrator
Join Date: 1/14/2004
Posts: 1217
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Posted: 5/29/2008 9:59:05 AM
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I don't expect them to go down any time soon. Oil is still on the rise and the dollar is still hurting.
Until the crack spreads for refiners come back in line, they will keep having to raise prices at the pump.
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