More on Oil

Mike, in Comments:

I heard this morning that the price of oil has dropped something like 10% in the last 5 weeks.

Now, in that same time, the price of gasoline has actually gone up something like 50%.

All those that yell "supply and demand" about the price of gas, never mention this, since, if the price of oil is going down, so should the price of gas. They shouldn't be going in drastically opposit directions.

Well, a few notes about prices:

First off, that 10% decline in the price of oil is probably including the $70+ spike that happened after Katrina. If you take a more reasonable high point ($68) the decline doesn't look nearly so big.

Secondly, the price of gasoline here in Ottawa isn't that much larger than it was before Katrina, either. We have to remember that a lot of places were dealing with $1/litre before Katrina hit. So $1.10 is worse, but it's not that much worse.

On the matter of diverging oil/gas prices: If I can put on the economist hat for a moment, I'd actually say this is exactly what you'd expect when a crucial intermediary part of the infrastructure was destroyed or disabled.

Oil obviously doesn't come from the ground in a highly useful form. It has to be refined, and then delivered in a refined form.

But what happened with Katrina and Rita? Well, a lot of oil production capacity was knocked out (some maybe permanently) but even more refining capacity was disabled (especially in Texas with Rita.)

So what happens next? Well, the stocks of refined product (gasoline) run down while the supplies of oil actually stockpile - the deliveries from the Persian Gulf continue, but there's no refining capacity to take the crude in, so it mostly sits there.

What happens to prices, in this crude model? (Pun unintended, but I'll keep it.) Exactly what's happened - prices for oil go down as stocks build back up again, but prices of gasoline go up until refineries can be brought back online.

Now, I don't have any data on this - so this shouldn't be seen as a diagnosis of the problem. Rather, I'm just trying to offer one possible explanation for it.

Or, you know, it could be that the oil companies are evil. And no, I'm not mocking Mike. If I can pimp yet another Linda McQuaig book on people, go out and buy the lamely-title It's The Crude, Dude. McQuaig ably shows just how evil the oil industry has been over the last century. I mean, I'm no fan of the oil industry, but even I was surprised at the depth of their malice. It's out in paperback - go fetch!