I have to admit to being somewhat perplexed by the fact that gas prices are essentially flat over the last two months, while the price of oil has gone up by approximately 15%. The last time I checked, oil seemed to be a key component in the production of gasoline. The 18 month chart below clearly shows a direct relationship between oil prices and gas prices. With a lag of about a month, gasoline prices always follow the trend in oil prices.
A disconnect began in June of this year. In early June oil prices began a surge from $93 a barrel to a high of $110 per barrel. One year ago, when oil prices were only $98 per barrel, gas prices averaged $3.85 per gallon. Eighteen months ago when oil prices reached $107 per barrel, gasoline prices reached record highs above $3.90 a gallon. Oil prices have been between $105 and $110 per barrel for the last two months and gas prices are at $3.50 per gallon. They were at this same level when oil prices were at $88 per barrel. Based on historical relationships, gas should be priced near $3.90 per gallon.
Are the oil companies purposely reducing their profits out of the goodness of their hearts? I doubt it. The summer is supposed to be the busiest mileage time of the year. If I go back to my Econ 101 class, price is supposed to be determined by supply and demand. We know that the supply of oil in the world is pretty much flat, as Libyan supply is off-line, Iranian supply is not allowed on world markets, Iraq supply is still constrained by their ongoing civil war, and the miracle of shale oil is a fantasy storyline. Worldwide demand for oil keeps rising as China, India and the rest of the developing world continue to grow. This explains the high price of oil.
The only logical explanation for the lower than expected price of gasoline is either a decrease in miles driven or an oversupply of gasoline. I think it is a combination of the two. If you have your eyes open when driving around, you see Space Available signs in front of vacant office buildings, retail centers and industrial complexes on a scale never seen before. I see more closed boarded up gas stations than open gas stations in my neck of the woods. With labor participation at 35 year lows, there are millions of former working Americans not driving to jobs every day. Manufacturing business has left the country. Retail is spiraling lower. This means there are less trucks on the road delivering goods. Diesel demand is down 20% since 2007.
Oil is refined into gasoline, jet fuel, diesel, and heating oil. Jet fuel demand is down over 20% since the mid-2000′s. If diesel and jet fuel demand are 20% lower, refiners have probably decided to produce more gasoline. Combine this oversupply of gasoline with declining miles driven by Americans and you have lower prices.
Does this jive with the MSM and government storyline of an improving economy? Does this jive with the storyline of a strong demand driven auto recovery and not a subprime loan driven fraud?
If anyone has another theory for the lower than expected gasoline prices, I’d like to hear it. Meanwhile, enjoy the relatively low prices for now.