This morning my wife asked me this question and I had no idea how to answer it. But it's true that oil is down -- it trades at $34.39 a barrel; while gasoline prices have been rising between 10 and 20 cents a gallon from the low. I paid $1.66 a gallon for mid-grade three weeks ago and $1.79 for mid-grade last week. So what's the answer? Less supply because refiners shut down for regular maintenance during this time of year.
While this may not be true throughout the country, it appears to be so in California. In late December, The MercuryNews predicted that gasoline prices would rise 10 to 20 cents a gallon. Why? California refiners including Exxon-Mobil (NYSE: XOM) and Chevron (NYSE: CVX) cut back on production for their usual maintenance needs in January. Moreover, a BP plc (NYSE: BP) plant in Carson, CA , had mechanical problems that affected production.
Overall this means lower supply with demand remaining relatively constant. California's Energy Commission reports that production of CA's gas blend fell 11% in January from the previous month. In the short run, prices should fall back as these refineries go back to normal production. But experts predict that gasoline prices nationwide could hit $2.50 a gallon nationally this summer.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College. Portfolio recently published his eighth book, You Can't Order Change: Lessons From Jim McNerney's Turnaround at Boeing. He has no financial interest in the securities mentioned. He has no financial interest in the securities mentioned.
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Reader Comments (Page 1 of 1)
1-20-2009 @ 1:07PM
nick said...
I think obama wants the gas to rise and then he can tell the folks to drop it and he can take credit for it, the dumb ass should let the oil companys drill off the coast and in Alaska, but the bum is in the pockets of the green crowd, like Al Gore.
1-20-2009 @ 3:19PM
jpdr1100 said...
Hey Nick, your friends at Big Oil are currently rushing to shut down drilling operations around here. You can offer them all the fragile drilling sites they want; you'll find no interest. At these prices it doesn't pay.
1-20-2009 @ 3:28PM
Jan Paul Koch said...
Mr. Cohan hasn't been paying attention (no offense meant). When oil was "sky high," the independent refiners were making only 2¢ a barrel. It takes a lot of energy to refine oil, and when oil prices skyrocket, so do energy prices, generally. This plays havoc with the refiner's margins. With oil prices being down, the refiner's margins are restored. They are protecting their margins, now, by refining less gasoline, which boosts the price. This was explained recently in the Wall Street Journal.
1-22-2009 @ 4:52PM
aechic444 said...
I'm not sure about the anser to this one either but...
If you're trading XOM, you need to read this article-- Talk about current levels of crude as well as refinery operations.
Very interesting piece. Definitely filled in a lot of gaps for me.
http://www.greenfaucet.com/crude/too-much-oil-and-other-fuels/45696
Anyone else have any good links? I'm always looking for more information
1-26-2009 @ 6:41PM
Pump Girl said...
Enjoyed your article. Just another inquiring mind here.
It does seem like it has to be a supply/demand answer, but there are always market manipulation suspicions out there. Big oil not letting go of its "Golden Age" gracefully, maybe?
1-30-2009 @ 3:44PM
Polly said...
I live in Massachusetts and I heard that they were going to put a gas tax on fuel to make up for this failing economy.
Personally, I think it's all BS that federal/state governments can't work with all the tax monies they receive. I think it's more about too much political corruption which we are not seeing and that is what is at the heart of this crisis.