Truemors
It's happening again, but will we see a change at the pump? Oil prices have dropped to an 18-month low of less than $70 per barrel U.S., while the value of oil company stocks have increased by 7%.
On the surface it makes sense that gas companies would see stock prices rise in answer to lower crude oil costs. Oil costs less, therefore the gas companies are paying less for the oil they need to make gasoline. But, it isn't just this savings that helps the stock prices rise; it is the price being charged at the pump as well.
Gas prices should be tied to the price of oil, but the correlation is a loose one. When oil prices drop this doesn't always mean the price of gas will follow. Oil is an input product that must be refined into gasoline. What the drop today shows is that rising gas prices at the pump are not due to the price of crude oil, but to the rate at which that oil is refined.
Oil prices are at an 18 month low, and while this is good for some people in the fuel industry, others are not as pleased. When crude prices drop quickly while gas prices decline slowly only the gas companies see a jump in profit. Oil producers do not benefit, consumers do not immediately benefit, only the gas companies have reason to celebrate.
Oil prices have tumbled below $70 a barrel after the government reported bigger-than-expected jumps in U.S. crude and gasoline inventories. Investors took the news as more evidence that an economic slowdown is curbing demand for energy.
In its weekly report, the Energy Information Administration says crude stocks rose by 5.6 million barrels last week, well above the 3.1 million barrel increase expected by analysts surveyed by energy research firm Platts.
The EIA also says gasoline stock rose by 7 million barrels last week, more than double the build analysts had expected.
In response to the drastic drop in the price of a barrel of oil, down to more than half of the $142 per barrel price in July, OPEC leaders called an emergency meeting to find ways to stop the decline and stabilize profitability.
The rapid decline in prices had alarmed both petroleum company executives and oil producers, who are becoming increasingly nervous that oil's roller-coaster ride undermines the stability of energy markets.
Oil prices have dropped sharply in recent weeks amid the economic crisis and lower consumption in developed nations. In New York, oil futures fell as much as 8 percent to $68.57 a barrel Thursday, their lowest level since June 2007. Oil has lost half its value since hitting a record $147.27 a barrel in July.
While not quite a rout yet, the precipitous drop undermines the elusive quest for stability that both oil producers and petroleum executives say they need to invest over the long term. The sharp decline Thursday prompted OPEC members to move up an emergency meeting - initially set for Nov. 18 - to next Friday, to look for ways to stem the price decline. Analysts expect the cartel's producers to reduce their production by about 1 million barrels a day.
To consumers this doesn't mean much, except, in theory, lower prices on gas and consumer goods. While per barrel increases usually mean sudden jumps in the price of gas, for unknown reasons, extreme drops in the cost of oil don't result in immediate savings at the pump. Why does this happen? The answer is in the refineries.
As OilWatchdog's 2007 report on refinery price gouging shows. And the oil price report notes that major refiner Valero has already raised retail gasoline prices in some spots by 50 cents a gallon.Refineries have not operated at close to their peak capacity this year because they're trying to keep the price of gasoline up, even as drivers use less of it. It's been 15 years since the U.S. supply of gasoline on hand averaged an ample 30 days, which insulated prices from huge ups and downs.
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