It is pretty late here in north america. And pretty early in europe.

WASHINGTON (Reuters) - Senate Democrats Tuesday introduced legislation to stop a U.S. arms sale to Saudi Arabia worth $1.4 billion in a tactic supporters said was aimed at pressuring the OPEC country to increase its oil output.
"We are saying that we need real relief and we need it quickly. You (Saudi Arabia) need our arms, but we need you to cooperate and not strangle American consumers," said Sen. Charles Schumer, a New York Democrat.

Politics- it's politics stupid - it's also supply, nationaliztion, demand, hoarding, speaking of hoarding: WASHINGTON -- Jittery about a political backlash over gasoline costs as prices set yet another record Tuesday, Congress voted to halt deliveries to the Strategic Petroleum Reserve in defiance of President Bush.

Does China have a SPR- what about India? They have a few dollars lying around- why not buy oil- Oil is a much better investment than U.S. Treasuries.

But, there are many different grades of oil, ranging from light sweet (low sulfur, low viscosity) to heavy sour (high sulfur, high viscosity).

All refineries can handle the light sweet stuff, but only some can handle the heavy sour stuff.

If you run heavy sour through a refinery not set up for it, it takes forever to refine and the yield of the expensive stuff (fuel) versus the cheap stuff (asphalt) is not favorable.

There is a shortage of refinery capacity for heavy sour stuff. Thus, that stuff is relatively cheap, as your analysis would suggest.

However, there isn't enough of the light sweet stuff to go around, so of course, the WTI, Brent, etc., go through the roof. That's the light sweet stuff.

Of course the opposite would be true - a lack of refining capacity would keep down the price of oil

I disagree. Price of oil is ultimately determined by demand for gasoline. So if gasoline prices are high and the refinery capacity is low, then the price of oil will go up simply because the oil producers can demand more money per barrel and the refineries are willing to pay. Why would an oil producer accept $50/bbl when the refineries are able and willing to pay $125/bbl?

If this wasn't true then all the refineries would be bankrupt.

Thank you, CR, for posting on this. More commentary on oil would be welcome--changes in the oil market probably surpass changes in the housing market in importance, and you have been particularly incisive in housing.

What makes you state that gasoline consumption is down? On the EIA site I see annual increases in consumption through 2007.

Re: other jim

Taken from History and Analysis -Crude Oil Prices  the following quote attempts to answers your question. But this is talking about 1979-80 and the situation with respect to supply constraints compared to today is unclear.

"Surging prices caused several reactions among consumers: better insulation in new homes, increased insulation in many older homes, more energy efficiency in industrial processes, and automobiles with higher efficiency. These factors along with a global recession caused a reduction in demand which led to falling crude prices".

The rest of that article is pretty good. If you have some time it is worth a read.

Ah, the great game of oil.

As noted above, oil is not perfectly fungible, and inexpensive light sweet oil is growing increasingly rare, especially wher compared to demand for it, while heavy sour oil is available in abundant quantities. That the most profitable crude is seemingly becoming rarer should not be considered an indication for peak oil, any more than shrinking Arctic ocean ice cover in the summer is an indication of climate change. After all, people can come up with all sorts of explanations for observed facts.

Depending on your perspective, heavy sour crude is either sludge or black gold. Well, increasingly, according to the market, it is black gold, even if it actually remains sludge in fact. Which is why people didn't actually bother with it decades ago, preferring to pump the good stuff, leaving the sludge in the ground. Or recently, digging up an area the size of Florida to get at sludge mixed with sand, so as to create 'syncrude.' The fact that we are now making 'syncrude' to meet the demand for crude is another of those non-indications of peak oil, by the way.

But there is another factor involved in U.S. crack spreads - European gasoline exports to America, which at least according to information on theoildrum.com, are running at something like 1 million barrels a day. That's right, roughly 5% of America's total imports of petroleum come from Europe. Which just happens to help pay Europe's import oil bill, by the way.

Due to policy decisions made over the past couple of decades, most major European countries have encouraged diesel as the fuel of choice for wheeled transportation, both private and commercial. In part, because diesel motors are more efficient (though particulate pollution was ignored until recently, with French technology creating a market for particulates filters - they collect and then burn the trapped material). In part, because diesel is much more easily substituted than gasoline. If you have salad oil in your house, you too can tank up your diesel, at least when the temperature is above freezing. Diesels are quite unparticular about what they burn, at least in the short to medium term.

However, though it is possible to play with the parameters, refining oil leads to a number of products, running the range from asphalt to diesel to gasoline to jet fuel to liquefied petroleum gas.

Generally speaking, Europe has too much gasoline, resulting from the refining of oil which they buy in dollars - after having converted their euros to dollars, since there is nothing like a little exchange rate magic to help a profit margin.

Since storage is expensive, it is much easier, not to mention more profitable, to ship gasoline to the U.S., where so many people can't imagine life without it.

The history of gasoline is fascinating - originally, it was considered to be pretty much a pain, compared to the things which had real value - asphalt and kerosene. Gasoline powered cars offered the chance to turn a highly flammable niche product into gold, and Americans ran with the idea. Including such ideas as paying workers high enough wages to actually buy what they made, or buying cars using installment credit, and of course, suburbia.

A comparison of the efficiency of European refiners to American ones is likely not publicly available, but it is a pretty fair assumption that European refineries as a rule use more modern technology under stricter standards than found in such places as Texas.

Efficiency can be quite profitable, under the right circumstances. A secret which many American companies have dismissed, in favor of the dynamic advantages which cutting edge financial engineering offered them.

I agree with The golden age of burlesque. You will get even worse picture at this graph if the crack spread stayed constant in dollar terms. Apparently it increased, but the crack spread goes not only for refiners profit but must pay for refining costs which are energy intensive and are also growing. However, the impact on refiners margin is less that this graph suggests. If you have different scales for different series, you have a distorted picture.

Maybe OT,

I worked for a Harvard trained oil lease broker once. He liked to describe how the majors would flood the market with crude, time and again, and squeeze the wildcatters by busting the crude price from $10 to $1/barrel. Then they would buy production from the wildcatters before cutting back production again. Now,it seems, by limiting crude production and raising the price, the squeezing is moving down stream affecting the refiners (and end users- us!)

Another point, don't tell me about OPEC's dwindling reserves. Tom, the lease broker (and producer), convinced me long ago that cartel members and the majors have little incentive to report accurate data information. Think about how much oil the majors say they have stored in Nigeria or the dimensions of on oil field there. Who is going to go there and check - Deloitte?

Remember, an oil well is a hole in the ground owned by a liar.

How much refining is actually done by dedicated refiners, though? If you're an oil company like BP or Exxon and you're refining oil that you produce yourself, then it's all gravy, surely.

I may be the only person still interested in the gas tax holiday analysis done by over 200 economists. No reputable (or disreputable) economist backed the idea, with many claiming that nearly all the tax relief would be captured by the sellers of gasoline. Such analysis was described as "Econ 101" and therefore obvious to all right-thinking people.

But even a cursory look at the actual business of gasoline retailing would have informed economists of the weakness of refiners and marketers on pricing. The idea that they would capture the 18 cents/gallon was ridiculous. Why does Sunoco like losing money? Why don't they just raise prices 18 cents now? Why don't the boneheads at Valero look at their Econ 101 textbook and insist upon the price that inelastic supply grants them?
Maybe the 200 petition-signing economists will draw up a new statement--promising not to pontificate about markets they don't understand.

CR,

Your economic analysis is, of course, correct. I think that this notion that reduced refinery demand can mean higher oil prices - which is pert nigh ubiquitous in the financial press - reflects a trading issue, rather than economics. That is to say, it can prove true in the short term, and apparently often does. When gasoline is up, simple trading formulas call for the purchase of oil. The trader responds to the formula, without thinking much, or caring much, about the cause of the rise in gasoline prices. In a perfect market, somebody would be right there to teach the dumb-rule-based trader an expensive lesson, but this is petroleum we are talking about. There are people who trade the spread, but price behavior suggests there is a strong tendency to follow the dumb rule - all petroleum prices tend to follow whatever market is leading that day.

Weak dollar = Higher crude oil.

If you plot the $/barrel price for both, you'd get an idea of the margin. (I think for that purpose you can ignore that a barrel of oil does not exactly yield a barrel of gas)

A barrel of oil doesn't come close to yielding a barrel of gasoline. A 42 gallon barrel of oil is going to end up giving you somewhere in the range of 20 gallons of gasoline and ~24 gallons of other stuff (the refiners add a few gallons of "stuff" in the refining process).

My chemical engineer sister used to work down in the refining industry in Houston and explained a bit about the process to me once - a few years ago and in some layman terms... So I could be a bit wrong...

Crude oil is a mixture of a whole bunch of hydrocarbon chains all mixed and bonded together. The "cracking" process breaks them up so the refiner can separate the hydrocarbon chains based on length. The refiner doesn't have some dial where they can crank up the diesel output, or lower the gasoline output. They pretty much just get whatever that barrel of crude happens to contain.

I've read that the extra steps involved in producing the clean diesel adds less than 15 cents per gallon, so it's pretty likely that high price of diesel in the US has a lot to do with the hydrocarbon content of the crude that the US is refining. Up here in the midwest, we mainly refine crude from the Canadian tar sands. Perhaps it just doesn't yield as much diesel as crude oil from Saudi Arabia does.

I'd like to see quantification of the "US gasoline demand is falling" assertion.
Mike | 05.14.08 - 10:46 am

and

other jim writes:
I'm curious if demand in the U.S. is falling because we are driving fewer miles or because we are switching to more efficient cars.

Answer to both in Floyd Norris blog?

Business - Floyd Norris Blog - NYTimes.com 

Scroll down to "Park the Car," posted May 13.

Excerpt:

Americans are driving less. It is not clear how much of that change is due to recession, and how much to higher prices, but the trend seems clear.

There are two ways to save gasoline — by using more fuel-efficient cars and by driving less. There is a trend toward more fuel-efficient cars, but any impact from that will take years to show up. (The gas-guzzler you sell becomes the used car purchase of someone else.) So this may be a real willingness to drive less.

Thank you, CR, for posting on this. More commentary on oil would be welcome

I agree.

trader walt: "Another point, don't tell me about OPEC's dwindling reserves. Tom, the lease broker (and producer), convinced me long ago that cartel members and the majors have little incentive to report accurate data information."

There are lots of external ways of measuring the health of a field like Ghawar with no cooperation from the field owner. Total number of wells (as the remaining oil becomes segmented into pockets, the number of necessary wells increases non-linearly rather than just putting down one nice bottle-brush drill at the start), number of barrels pumped per well (obviously each little pocket doesn't produce as much), and most interesting lately for the Saudis, gallons of water pumped out per gallon of oil. Based on these things Ghawar is going mature, which means the Saudis don't have much room to maneuver supply-wise. And it's mostly heavy crude they produce anyway.

Char: Supplies are stockpiling

And by what measure would that be? We have as of last week 22.7 days of supply of gasoline in the u.s. DOWN from last week's 22.9. This week in 1998 we had 26.9 days of supply. This week in 1992 we had 30 days of supply.

Therefore, the best SORT is ______. Entries?

Fewer refineries would NOT lead to lower oil prices. It is something I call the "Refinery Paradox": when a refinery blows up, oil prices go up. There is a point at which the opposite will happen, but I don't think the oil companies would let us test this.

Why is this so? Because most crude oil is worthless. The prices of refined products determine the value of crude oil. So, when a refinery blows up, there is less gasoline and the price goes up; other refiners will scramble to secure crude oil to turn it into valuable gasoline.

Refiners continue to run with negative margins because it is often cheaper to do this than to shut down. And once you shut down, it becomes difficult to determine when to restart since you don't know if the market is strong or simply supported by your shutdown. And, you are also subsidizing your competitors.

Additionally, refiners have term contracts. It is often not possible to meet those obligations from the market.

Refining is a long-term, volatile business with massive sunk costs. Margins rise and fall, sometimes staying negative for long periods. Refiners try to optimize runs and run rates, switching crude grades and tweaking outputs (sometimes also shutting down specific units like cokers). In the long run, they make money.

Thanks, Expat, for explaining many aspects of the refinery business. I learned a lot from your explanation.

My puzzlement at why refiners can not pass on the full cost of the rise in crude prices could be explained if refiners had long term contracts at fixed costs. Is that the main reason refiners can't pass on full cost of rising crude?

I understand the point that "Refiners continue to run with negative margins because it is often cheaper to do this than to shut down." My basic question is why refiners ever have to have negative margins, when it would seem they should have pricing power.
As mentioned above, the refiners would not have pricing power if they entered into long term contracts at fixed costs. Is that the only important reason that refiners have negative margins? or are there other important factors?