Daniel Moser

Ike vs. Refining Capacity and Oil Price

I am afraid that you (whisper) are missing the point to some extent. While you are correct that crude and products (gasoline, distillate, etc) do move in tandem to an extent-albeit even a relatively large extent, refinery margins have been terrible in the U.S. because we have a gasoline driven economy. Unfortunately, for whatever reason, the U.S. made a huge bet decades ago to run the economy on gasoline vs. diesel thus we built the infastructure for gasoline.

If gasoline and crude oil followed a more historical path over the last year or so, gasoline would be closer to 4.5-5/gallon. Maybe even higher. Big oil companies are capital constrained like any other industry. Arguably even more so given the fact that they can operate on 10% of the total reserves in the world .

Exxon probably has terrible margins on their retail gas stations relative to E&P. Hence, a capital constrained company sells off their low margin businesses in an effort to invest more heavily in higher margin businesses like more exploration and production.

Within the last 3 years refinery margins were at their peak for both distillate and gasoline production. They put off a lot of maintance work at that time so that they could boost earnings as much as possible. Now they are paying the piper. That is a large reason that refinery utilizations are down so extensively. They are operating with really old facilities and put off maintaining them properly for a few years.

In my opinion, although no one asked, the recent volatility has practically nothing to do with the underlying fundamental picture. Quite frankly this is all about liquidations. I don't pretend to know where the equilibrium price of oil is but I am quite confident oil should not be moving $5 a day and natural gas moving 50 plus cents a day under normal, fundamentally driven circumstances. Don't be too hasty to draw conclusions about the direction of energy prices currently. There is a tremendous amount of noise in the system. This is what happens when you let banks get into the world of energy. This is little more than market contagion spread by the failure of most institutions that used credit to hold assets.

The case winner here is that we need more infastructure (pipelines, refineries, etc). Until that happens energy price volatility will remain tremendously high. Drilling is a moot point if it isn't refined and distributed. Enough Said.