May 14, 2008
The Real Culprit Behind High Gasoline Prices
The real reason behind the high gasoline prices may come as a surprise to many. That surprise is ethanol, the controversial biofuel making headlines for causing a global food crisis. When our government decided to phase out MTBE and replace it with ethanol, they did the âunthinkableâ (pun intended), and did not analyze the ramifications of this change.
When a barrel of oil is cracked (refined), it results in approximately 2/3rds gasoline and 1/3rd distillate products, such as diesel, jet fuel and heating oil. While the refining process can be adjusted to make more of one product than the other, the amount is very minute and usually requires expensive and time consuming changes to be made.
The new blend-stock gasoline is comprised of 10% ethanol by volume, replacing an estimated nationwide average of 2% MTBE by volume in the old blend. This has automatically dropped gasoline demand at the refinery level by 8%. This loss of demand has allowed stockpiles of gasoline to build to 15-year highs on a very low (sub 88%) refinery utilization. Gasoline does not store well for any length of time and thus is why we have never implemented a strategic reserve for it.
The loss of demand and subsequent downward adjustments in refining runs has however, reduced the production of distillates by roughly the same 8%. The problem is that jet fuel and diesel do not have a new additive to make up for the lost 8% like gasoline does. The result is a continued drawdown of these stocks to low levels, with no end in site.
The refiners are stuck between a rock and a hard place. If they choose to increase refining runs to keep up with distillate demand, they wind up adding more stocks to an already oversupplied gasoline market. If they focus on keeping the gasoline runs in line with demand, they are undersupplying the distillates. At this point, they are choosing what is fiscally responsible for them, which is to keep from stockpiling any more gasoline.
With such high supplies of gasoline, why is the price continuing to increase? The answer to that is in the higher prices of the distillate products. The price spike in diesel is leading the crack spread (the price difference in buying oil and refining it into gasoline and distillates). As diesel prices keep moving higher, gasoline prices will have to increase as well to offer the refiner an incentive to run. If gasoline prices did not keep up with distillate prices, the refiner would choose to cut refining runs rather than take large losses on 2/3rds of what is produced (gasoline).
From a fundamental standpoint, it is easy to see that falling stockpiles of distillates are leading the entire crude complex higher, with no end in sight. On top of this, global food inflation is running at extreme levels not only from higher energy and related production cost, but also from the drawdown in global grains because of our ethanol mandate.
In conclusion, the only plausible solution in the short-term, is to greatly reduce or eliminate the ethanol requirement in our gasoline blends until a more prudent lasting solution can be defined. The increased refining utilization would start providing relief to the dwindling stocks of diesel, jet fuel and heating oil. Without a change, the next major problem will be astronomical heating oil prices for the coming winter and a continuation of food shortages globally.
-Jason Tidwell
All rights reserved.
