Pardon the indirect quote, as I do not subscribe to WSJ. I keep hearing that prices are determined by supply and demand. It wasn’t THAT long ago that you could occasionally get gasoline at $1.00 a gallon. Why are we paying over $3 in a “glutted” market?
The cited article is discussion valuations of the companies that sell the commodity; a surplus of oil/gas/widgets will not necessarily devalue the company. In fact, if I were investing in a fuel company, I would WANT there to be a fuel surplus - it means that they will be able to continue satisfy demand. Without surplus to hold in reserve, they would be on the brink of insolvency (no gas to sell = no more profits).
In terms of why the price of fuel at the pump, the oil companies and the US government wisely keep reserves on hand “just in case” - in case of war, in case of a collapse in production, in case of a sharp rise in consumption, in case Iran turns the Strait of Hormuz into a free-fire zone, etc. Plus, if I could charge $3.00/gallon of gas, I’d be looking for ways to charge $4.00 (which, btw, is still cheap compared to what it costs in much of the world).
Here’s a chart for inflation-adjusted gas prices.
The low from 1998 you remember is the real outlier that needs to be explained. The price now is hardly unusual, even if it is at a high.
As that chart also shows a decade is a long time in pricing history. The environment for discovering oil, producing it, and refining it changes rapidly. Every commentator on the subject for the past decade has talked about the huge and rapidly growing market in China and India, forcing competition for available supplies and in the futures market. Threats to oil producing countries have flared over and over, sometimes with oil flowing to bring in money, sometimes with oil shutdown because of dangerous conditions.
That’s supply and demand at work. But short term, rather than long term. Yesterday is gone. Gasoline will never be cheap again. The big surprise is that it’s as historically cheap as it is.
Your quote above refers to a glut of oil refining capacity, not a glut of oil production. That’s not the same thing at all.
Are you sure? The Strategic Petroleum Reserve has been filled via direct open market transactions (at market rates). Lately it has been under a royalty-in-kind process. For several years, no oil was delivered to the SPR so as not to increase the federal deficit. It’s my understanding (and I can be wrong here) that the filling of the SPR was timed (it’s no longer being filled so it remains below capacity) to greatly reduce any impact in the greater oil economy to the consumer.
This US Senate staff report makes a very good case for speculators causing the disconnect between price and supply and demand.
Not to derail this thread entirely, but what purpose do speculators serve? Why can’t the government just declare that oil (or other commodities) must be physically bought and sold?
It can help stabilize prices and supply in other markets.
For example, farmers are helped out if they’ve got a good handle on what prices might look like in the near future. They can then plan what and how much to plant.
But yeah, the basic answer to the OP is that a “glut” in refining capacity is not a glut in either gasoline or crude oil. We don’t have a glut in either of those. Refining margins are tight (often refining loses money), so shuttering refineries can help companies actually make some money. It’s so tight that some companies (like ConocoPhillips recently) have spun off their refining divisions to keep that drag off the balance sheet.
The oil market is global; stopping only American speculators would have virtually no effect. Also consider that when the government intervenes in global markets you end up with situations like the sugar market.
Americans pay about twice the global price for sugar while the government (read ‘taxpayers’) pays subsidies to big sugar growers. Candy companies like Brach move their production plants to Canada because they can’t be competitive with companies that pay half the price for sugar. Sugar processing plants close, throwing more people out of work because the companies they used to supply move to other countries or switch to using high fructose corn syrup instead of sugar … and then HFCS becomes a possible major health issue.
Other sugar growing countries, like Brazil, get pissed at the US because they can’t sell their sugar here, so they reduce their purchases of US grain. The American sugar growers who get the subsidy use it to lease the cropland that used to be used to grow things like soybeans, so the (unsubsidized) soybean farmers are left without enough land.
On and on it goes with unintended consequences. That’s only the tip of the iceberg that is government intervention in global markets.
I may have been being a bit flippant. My point was that the SPR exists to serve a similar go, rather than to directly address economic impact (DOEhas a rather interesting web-accessible description of the nature of the SPR and history of drawdowns). The SPR has a capacity of 727 million barrels which, to fulfill International Energy Agency requirements, is expected to provide the US with ~75 days of import protection; this is supplemented by commercial stocks that bring us up to the required 90 days.
The largest drawdown in reserves we’ve ever encountered was in 2011, in response to the Libyan/Middle East crisis. We released over 30 million barrels in order to maintain supplies and reduce price impacts on the global market.
Thanks for the chart. In SC, we are often 20-30 cents below average, so I was probably remembering the dip in 2003 (I wasn’t here in 1998). As I understand from other posts, it is the cost of oil to the refiner that is driving gas prices since 2003, regardless of refining over-capacity.
This 2006 report is a gold mine! Too bad we didn’t use this knowledge to head off the 2008 market crash. It will take a while to digest. . . Looks like the underlying factors haven’t changed much since 2000. Our commercial crude oil storage is full, and war fears are keeping futures over $100/bbl in the face of somewhat reduced gasoline demand. If we could introduce a bit of buy-low/sell-high into the SPR, it might take some wind out of futures speculators, as well as paying down some national debt.