PARIS (ResourceInvestor.com) -- Gasoline output in the U.S. actually fell last week by 120,000 barrels a day. More maintenance, both scheduled and unscheduled, lead us to this point. Refineries, and not just BP’s crumbling Texas City mess, will keep breaking down. Meanwhile the American driver is paying over $2.80 per gallon for gasoline on average and we have not even reached the summer months.
We are getting to the point, when the national average gets high enough when people are going to start complaining. It will be interesting to see the reaction. Will President Bush blame it on his weird mantra, “dependence on foreign oil?” As if American can ever not be dependent on foreign oil, just like it is dependent on foreign workers and currencies. What will the excuses be? After all the price of crude oil, though fairly high around $65 per barrel, has not hit its $78 peak again. What reasons will be given?
We need only remember back a couple years back, to the times when none other than OPEC warned the industry this was the future.
Refineries had historically been making terrible profits, all through the 1990’s and into the start of the new century. Many oil companies worked long and hard to shut down their facilities, conspiring to do so and being caught in the process. Today this seems like extremely short term thinking.
Companies have been forced to upgrade and expand their refineries. But this has its own problems as the more complex facilities are just that: more complex. When they go wrong they take longer to fix and it costs more. None of this helps. Companies like Valero [NYSE:VLO] as well as BP [NYSE:BP], have seen their refineries involved in accidents and shut downs and the turnarounds will not be until the end of the year.
All of this is pressuring the price that American drivers are paying and will pay at the pump. It will also add to pressure on the price of crude oil, especially of the light sweet variety. Both Brent crude and WTI are lovely light sweet blends you could pump straight into your car engine.
Conversely the drive to stop using so much light sweet crude has propelled companies to make refineries, the complex ones we talked about above, that can handle the sandy sulfurous heavy crudes. These are the types of oil now more readily available on the marketplace. So the oil complex is stuck in a rather vicious circle. It wants to use heavy crudes because the price of light sweet is so high and it ends up being expensive at the pumps. But the technology to refine the heavier stuff is more difficult, which leads to more accidents, which leads to costlier repairs and longer downtime, which pressures prices which takes you back to the start.
Once again what this shows, and what many example of so called ‘peak oil’ show us is not a failure of geology. It is not that the hydrocarbons are missing. There is enough oil to extract and refine to satisfy the market and pull down prices. What it does show is the failure of ‘free market’ or ‘neo-classical’ economics. When economies are almost entirely reactive, in other words they respond to events rather than plan ahead, then when something relatively new happens - such as the emergence of China - they are unable to cope.
What seemed a great idea a few years ago, such as laying off workers, closing refineries and mothballing a whole variety of facilities, now seems like idiocy. Quarterly profits were more important than any kind of long term notion of ‘good’ and now the subsidy to correct the situation must be passed, from the American driver, to the American executive as a result.
While the world economy is in the hand of the American model and while the American model is in the hands of a few thousand executives you can bet on this going on. And bet on the price of crude to go higher on the way.
