Slippery Oil Prices

Gasoline has been selling around $3 a gallon, threatening to go higher and, hovering in the “denial” areas of our brains, is the possibility it could go A LOT higher. Though we avoid dwelling on it, darn near everything in our daily lives relates to the cost of fuel. If it changes too much too fast we will DEMAND government DO SOMETHING about it. What we ask and what they do is just about guaranteed to be wrong.

Oil is a major input into the refineries. Outputs vary from refinery to refinery, including oil, gasoline of three octanes, diesel both died and undied, kerosine, etc. Refinery capacity in the USA is running around 98 percent.

Further complicating that, oil is not a completely homogeneous product. Some crude makes better or more of one output than other. Thus what is available through regular channels to each refinery will produce a different output, or different quantities of each output.

Federal, state and local regulations coupled with local resistance have prevented any new US refineries from being built in over 20 years. Meanwhile, our consumption has grown dramatically in that same period of time.

Ethanol is the sad case of what politics can do to our fuel supply. Were we a large sugar-cane producing country like Brazil, we could efficiently produce home-grown ethanol. Ours, on the other hand, requires 9 gallons of diesel to produce 10 gallons of ethanol. Worse, alcohol has less energy per gallon, which increases consumption. It is a lose-lose situation, except for the companies building the ethanol refineries and the politicians they support.

While raw oil is reasonably mobile, refinery outputs tend to be regional. When demand doesn’t match supply exactly, the product under-produced will rise greater than the product in plentiful supply. Thus sometimes you will find diesel at your pump to be less or more than gasoline. For the same reason, regional price differences can vary all over the map.

While those around me scream about higher fuel prices, I would prefer a modest increase that could provide incentive for new refineries. That, coupled with popular and political approval for some new refineries in my region (just not my back yard ๐Ÿ˜‰ ).

Higher prices also attract entrepreneurs into biodiesel production. Biodiesel can be produced competitively and economically in most agricultural areas of the USA. Years ago when petro-diesel was just over $2, a farmer friend told me that at $3.00 per gallon, he could profitably grow the inputs and produce biodiesel. Sure enough the plants are starting to spring up thanks to the $3 diesel pump price.

Another nice thing about higher prices is that it motivates change in consumption. When we aren’t whining about gasoline prices, we are complaining about traffic, pollution and lack of mass transit. Nothing would clear our streets and make mass transit economically viable like $10 per gallon gasoline. We will go down kicking and screaming, but we will go down. Of course we also will embrace diesels, bicycles, walking, living closer to work and shopping closer to home.