Submitted by EnergyTechStocks.com
To protect their bottom lines, oil refiners are employing a strategy that could send an already weak U.S. economy into freefall this summer. To be sure, the U.S. summer could pass without serious incident. But the potential exists for things to get ugly.
As has been widely reported, U.S. oil refinery utilization has been extremely low heading into the peak summertime gasoline season. Even after last week’s 4 percentage point increase, utilization is still only 85.6%. While gasoline inventories remain high, even when refinery utilization holds above 90% for several weeks, imports of refined gasoline from Europe usually are needed to quench American motorists’ summertime thirst.
As noted by Optionetics.com, an online investment research firm, because refiners face raw material costs (crude oil) that have risen much faster than the price of their product (gasoline), they have scaled back operations, hoping to lower crude prices by allowing crude supplies to build while simultaneously working off those high gasoline inventories.
This strategy could fail in part because of what U.S. State Department energy official Jeffrey R. Izzo recently told EnergyTechStocks.com, namely, that global oil demand may keep rising even if the U.S. goes into a recession, which some would argue it already has. If this happens, crude supplies won’t build, oil prices will keep going higher, and U.S. refiners’ margins will remain under severe pressure. (For more on Izzo, see 4 Experts on Why World Teeters on Brink of Energy Crisis – #1: US State Dept.’s Izzo ‘Frightened’ By NOCs.)
Meanwhile, as Optionetics.com has noted, with the U.S. dollar still very weak, international hedge funds and sovereign wealth funds likely will continue to seek refuge in the crude oil futures market, because it’s the one commodity market big enough to absorb their billions. Consequently, crude’s disproportionately high price compared with gasoline could become even more pronounced, putting refiners’ profit margins at even greater risk.
If their strategy doesn’t work, refiners’ natural tendency will be to wait until the last possible minute to maximize production. But what nobody can predict is whether American motorists will cut back this summer in the face of a depressed economy and already record pump prices.
The scene along the New Jersey Turnpike last Thursday night illustrates this uncertainty. Motorists, many of them from other states with higher pump prices, lined up at rest areas to buy gas before prices were to go up the following day. Was this a sign that high prices will force a cutback in miles driven or that motorists will feel they have no choice but to keep driving as much as ever and will increasingly seek out whatever price “bargains” they can find?
If energy economists like the late Milton Copulos are correct, most Americans will have no choice but to throw good money after bad by continuing to fill their gas tanks to drive to work (unless employers suddenly realize that, as labor experts point out, up to 40% of all U.S. workers could telecommute). Meanwhile, as Tom Kloza, chief analyst at the Oil Price Information Service, told a reporter the other day, “If you’ve got a vacation planned for Disney World or something, you’re going to take the vacation.”
Refiners can’t lose by waiting to the last second to maximize output. If demand doesn’t slacken, refiners could wait too long. Inventory levels could suddenly drop and pump prices could spike, maybe reaching $5 a gallon in parts of the U.S.
All it would take for things to get completely out of hand would be an equipment failure at one of America’s antiquated refineries or a Category 3 or higher hurricane that roared through the Gulf of Mexico. But even without these system-wide disruptions, U.S. commerce would be crippled if truckers decided they could no longer afford to stay on the road. (There have already been sporadic protests.) Shortages of perishable food items would then materialize within days, striking a psychological blow to the entire economy.
How great a psychological blow might $4+ gas deliver? According to a 2007 survey, if gas was to top $4 a gallon and stay that high for several weeks, even many wealthy Americans would “panic” and stop spending. (For more on a potential consumer “panic,” see Expert Says When Gas Hits $4 a Gallon in U.S., Majority of American Consumers will ‘Panic’.)