Gas Prices: The $4-a-Gallon Misunderstanding

Now that gas is over four dollars a a gallon again, you will be hearing the cry of “Drill baby, drill” across the land. The hucksters who manipulate the politicians in Washington (and throughout the western world) will be screaming for less regulation, more domestic drilling, even if it means death and destruction like the recent BP disaster in the Gulf of Mexico (photo above).

At first glance, you might think that the “unrest” in the Mideast and other events you read or hear about on the news are choking off the supply of oil and – as Adam Smith observed – when demand exceeds supply, prices go up.

But it ain’t necessarily so this time. As Alan Farnham, of ABC News, reports:

Patrick DeHaan, senior petroleum analyst for GasBuddy,com, which tracks gas prices coast to coast, admits the fluctuations in the pump price of gas are “very difficult for people to understand.” He explains why the recent decline in the price of crude didn’t translate into cheaper gas: “The bottleneck is the refiners – the middlemen.”

At the same time that inventories of crude are increasing, inventories of gasoline are dropping. “For 10 consecutive weeks gas inventories have been dropping – and now we’re headed into the big summer driving season.”

Result: No price break for consumers.

Add to this a cresting Mississippi and some unfortunate accidents of timing. A number of US refineries were closed a year ago, when the price of gas was lower and refining was less profitable. Getting them back online takes time. They can’t just be restarted with just a snap of the fingers. An electric power failure two weeks ago in Texas knocked out 4.4 percent of US refining capacity. And the rising Mississippi threatens to close refineries in the Gulf. All of this puts upward pressure on gas prices.

Oil industry expert Andrew Lipow – no conspiracy buff – calls this simply “a confluence of events”: We’ve got crude aplenty, he says, but a diminished capacity to turn it quickly into gasoline.

In ordinary times, there’d be a lag of about two weeks between a change in the price of crude and a corresponding change in the price of gas. But these are not ordinary times. The two prices are not moving in their normal relation, owing to the refining bottleneck.

Click here to read the report.

There’s also the skewing of the oil market caused by rapacious speculators. But that’s another story.

Click here for details.

The bottom line is that drilling for oil in the Gulf of Mexico has nothing to do with the price of gas on I-75. So the next time you hear some politician on TV urge America to  “Drill baby, drill,” just change the station.