Expert Says Oil Prices Will Drop, Explains Why Gas Cost Really Spiked

New American Media

Editor’s Note: Why is the price of gas spiking? While Republican candidates blame President Obama, energy experts point to global market forces at work—the complications of supply and demand. To get the inside story, New America Media’s Ngoc Nguyen interviewed David Hackett, president of Stillwater Associates, an energy consulting firm specializing in the transportation-fuels market, based in Irvine, Calif. Following are excerpts from her interview.

New America Media (NAM): In the United States, gasoline demand is down and domestic production has been growing, so why are we seeing a spike in prices at the pump?

David Hackett: The prices at your corner station are a function of three basic things: Crude oil prices, regional gasoline supply and demand and local competition. So with those three things in mind: Crude oil prices are high — $108, $109/a barrel in West Texas Intermediate [WTI crude oil]. And that price is actually lower than the world benchmark, which these days is North Sea Brent crude, some $15-$20 higher.

The high crude prices are driven by supply problems in Africa and Europe and the international tensions around the Iranian nuclear program. Crude oil is a worldwide market. If there’s a shortage in one part of the world in crude oil, it will have an impact in other markets. If you have a bathtub and you take water out of one corner, the level of water in the whole bathtub goes down, so there’s less supply of water in the bathtub, not just the corner you took it out of.

NAM: What else is driving gas prices up?

Hackett: The refineries on the West Coast are having a streak of unplanned maintenance problems, unplanned down time –the Chevron [refinery] in Richmond, Calif., BP Cherry Point [refinery] in Washington. Both big plants have had unplanned maintenance problems and have gone offline unexpectedly.

This is the time of year when refiners normally do their maintenance in the first quarter. When they have planned maintenance, they can arrange ahead of time to cover their operations. In this particular case, these problems seem to be more extensive than people anticipated, so there’s been a large draw of inventory of gasoline on the West Coast, and prices have shot up. If you’re a California consumer or West Coast consumer, you’ve seen a greater increase in gas prices than other parts of country.

According to the Energy Information Administration, regular-grade U.S. average is $3.72, and in California, it is $4.29. It’s 37 cents higher than average. Normally, [California prices] run something like 20 to 25 cents higher.

NAM: Will prices at the pump continue to go up?

Hackett: On a short-term basis, I think it is over. The spot price – that’s the price refineries and trading companies sell to one another in large quantities — today’s values were pretty much the same as yesterday. So, the market has reached equilibrium for now. It’s gone up as high as it’s going to go right now.

Where it is going to be in March? My answer is, let’s see. If tensions in Middle East continue and refineries continue to have unplanned outages, they will stay high. Gas supply will stay short, [and] lead to high prices. [These are] two key drivers that you can see right now.

NAM: We’re hearing a lot about the benefits of increasing domestic crude oil production – won’t that help to bring gas prices down?

Hackett: More domestic production — that’s nice, but the issue is it’s all jammed in the center of country. It can’t get to the coast. The rapid growth in production is in that region, especially North Dakota. All the pipeline routes out of the mid-continent to the coast are full. Pipelines are the cheap way to move oil. Oil continues to be produced but gets moved in ways that aren’t cheap — rail, barge and truck.

NAM: TransCanda, the company that wants to build the controversial Keystone XL pipeline, now wants to pursue two separate pipeline projects. If the second leg of the pipeline — taking crude oil from Cushing, Ohio to Houston and Port Arthur, Texas — were actually built, how would that affect prices at the pump nationally and in California?

Hackett: Any additional pipeline capacity out of the mid-continent to the coast will reduce the delivered cost of that crude and create price competition with coastal crudes. This competition will especially reduce crude prices in the local regions and likely worldwide. There are no pipelines on the drawing boards from the mid-continent to California at this time. The price competition on the Gulf Coast would help lower prices overall, but, less directly in California.

NAM: Demand for gasoline is also down, so why isn’t that driving prices down too?

Hackett: Prices reflect the world market. If you are a seller of gasoline, demand is bad, but there are other forces at work that are driving the price of gas. In other parts of the world, the economy is good.

There’s a minimum level that a refinery can process, or it will have to shut down. So if they have to run at 80 percent and can’t sell all of their product [in the United States], then they will look for offshore markets to sell their extra product.

NAM: They could also sell it to U.S. consumers at lower prices, right?

Hackett: That’s assuming they can find buyers. If the price goes down, are people going to go out and buy more? Gas demand is relatively inelastic. It takes big price changes before people change their consumption behavior.

Could [oil companies] pound additional gas into the market? They may very well. What happens in refining has an impact, but it’s nowhere near as big as the crude-oil market.

NAM: Speaking of the world market, has the United States become a net exporter of fuel, as some have said?

Hackett: The U.S. imports more crude oil than it produces. The U.S. uses 14 million barrels a day of crude oil and produces a little less than 6 million barrels a day, so we’re importing 8 million barrels a day or so.

The U.S. imports a lot of gasoline to the East Coast. And the U.S. historically has been a diesel exporter, because refineries here can make ultra-low sulfur diesel exported to other markets.

[The U.S. also has] gasoline exports. Quite a lot of crude that comes from Mexico and South America [to be refined in the U.S.] and gas goes back to those countries. Recently, more gasoline has been exported out of the Gulf Coast than has been imported into the East Coast.

That reflects strong markets in South America. The economy in Brazil is booming. Not only are we importing crude from Brazil and sending gas back to Brazil, our farmers are exporting ethanol to Brazil. That’s because the Brazilians with their sugarcane are making sugar instead of ethanol. They are making sugar because the Chinese and Indians can afford Brazilian sugar. They do better if they make sugar instead of ethanol and replace their ethanol demand with [more economical] ethanol from the U.S.

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