Taming the Gas Pump Shrew
Fueling the economy
It happens to us at least once a week, sometimes twice: The gas pump confrontation. We simultaneously pump fuel into the gas tank and siphon much needed fuel out of the economy.
Craig Johnson, CEO of Customer Growth Partners, puts the problem in perspective. As of March 26, 2012, gasoline was 70 cents over December levels. He figures that an increase of this magnitude “takes almost $10 billion per month out of [non-energy] consumer spending...”, as reported by cnbc.com.
That’s a whole lot of eating out, minivacations and other discretional spending now on hold.
The prediction of future gas prices have been dire suggesting that prices could increase to $4, maybe even $5, per gallon before peaking. Recently, however, there’s talk that the price has peaked since the national average of $3.92/gal has held for some 2 or so weeks.
Let’s hope so.
The caveat to the “its peaked” assertion is that the oil supply has to remain stable, refinery capacity remain constant, and continued limp demand, i.e., slow or no economic growth. A real mixed bag. The former and latter seem pretty much in play. The refinery issue is the problem And here’s why.
Pricing gasoline isn’t as simple as looking at the price of a barrel of oil (ppb). This is so because gasoline is traded as a commodity like gold, silver, wheat, and 21 other items on the Standard & Poor’s GSCI Index. Accordingly, speculators really set the price. They have pushed the future price of gasoline (gasoline futures) up 24% thus far this year. And this has happened although the ppb of oil has not similarly increased.
Speculators consider a wide range of factors both empirical and emotional in betting on a future price. Refinery capacity is part of that equation as well. And that could be the rub.
We are in the middle of the largest incidence of refinery closures on the East Coast, or anywhere for that matter, since the early 1980s. While Midwest refineries are running at or near 95% capacity, the East Coast hovers around 60%, according to Oil Price Information Services. This means gasoline has be moved from the Midwest and Gulf to the East Coast to close the supply gap.
But if you only have 5 oranges, you only have 5 oranges no matter how you move them around the fruit bowl.
The refinery issue receives little or no national media attention. It is a huge issue, however. Our domestic oil production could be 60% of the world total rather than the 10% that it is but if you can’t refine the oil in quantities sufficient to meet demand, then you still have a shortage....and higher prices.
If a producer can’t maintain a profit margin to justify the production of a product, then it will cease that production. Such is the case with domestic gasoline refinery owners.
While many factors set the profit margin, government regulation has emerged as a major reason for the spate of refinery closures in the US. Regulations in play in southwest Pennsylvania, for example, requiring the production of certain gasolines to meet federal air quality targets, were instrumental in the recent closing of 2, possibly 3, refineries there. Unless these rules are suspended or repealed, these refineries will remain closed and the loss of jobs permanent, according to John Kulik, executive VP of the Pennsylvania Petroleum Marketers and Convenience Store Association.
Investor’s Daily is even more direct, according to Kenneth Green in The Enterprise Blog. In discussing the Pennsylvania closings, Sunoco lost nearly $1 billion over the past 3 years. Over this same period of time, it spent nearly $1.3 billion to meet EPA rules or possibly pay more in fines or penalties. This in addition to the fines and penalties already heaped on their other refineries by the Obama administration. Talk about adding insult to injury. And Sunoco is just one producer; multiply this out and you start talking about real money.
A shrinking refinery capacity is a real problem. And it needs addressing now by the Obama administration, the Congress and even GOP presumptive presidential nominee Mitt Romney. Ten billion dollars a month being diverted from a struggling economy is devastating.
The logical place to start is with a sweeping review of EPA regulations regarding air quality, how to best meet sensible targets with sensible rules on gasoline ingredients, and practical, workable requirements on plant operations. Perhaps we could overhaul the entire Agency transforming it from a “job killing regulatory engine of higher prices” to an agency that uses “incentives and work[s] cooperatively with local government and industry to achieve better environmental outcomes...” as suggested by Speaker Gingrich on his web page.
The point is this: A large part of the gasoline price problem is government created and the US government can take steps now to fix its portion of the problem. And it can be fixed.
We can have clean air and water and we can have an adequate supply of affordable energy in the form of gasoline. And we can have both without $9/gal gas, regardless of the goals of Energy Department Secretary Chu and the Obama administration.
This shrew can be tamed.