June 16th, 2012
Written by Gavin Kakol, GEI Associate
Petroleum products are continuing their downward trend. Crude oil futures fell to $83.91, down 91 cents from a week ago and over $10.90 a year ago. The average price for a gallon of gasoline in the United States currently stands at $3.524, down 4% from last year. Keep in mind, crude oil roughly accounts for 63% of what consumers pay at the pump. The other 37% of cost comes from refining, taxes, and distribution and marketing.
Follow up:A little arithmetic indicates that margins have improved over a year ago for refining, distribution and marketing entities collectively. Crude is down 11.5% year over year. Using the 63% ratio for crude contribution, gasoline would be down more than 7% if the refining, taxes, distribution and marketing (RTDM) were unchanged in dollar amount per gallon from a year ago. The national average for gasoline a year ago was $3.67, of which 37%, or $1.36 went to RTDM. Today, at $3.542 the dollar amount for RTDM is $1.50, an increase of more than 10%.
If the RTDM were still at $1.36 adjusted for retail inflation of 3%, or $1.40, gasoline would be $0.10 a gallon cheaper (nearly 3% less than it is). This assumes that the 63% for crude cost applies to both years and that taxes were not changed.
Editor's note: The cynical will point out that the tendency is to pass costs through as quickly as possible when materials costs rise but to be less aggressive in lowering when materials prices fall.
However, in spite of the decline, crude oil is still inflated well beyond where it should be. At a recent OPEC meeting, Fadel Gheit, an oil analyst at Oppenheimer & Co said:
Despite the drop in price in the last three months, we think oil prices are inflated and the global supply and demand outlook doesn't support current prices.
Demand for gasoline and other petroleum products is down. Since December this year, Saudi Arabia and Iraq have increased production by 1.4 million barrels daily. Within OPEC, Saudi Arabia is continuing to advocate maintaining supply to keep prices down, while Iran and Venezuela want to reduce output to increase price. Saudi Arabia is concerned of another global recession, which could further reduce demand for oil. Iran is hoping for increased revenues to deal with European sanctions.
According to Gheit, crude oil should be around $70 a barrel for West Texas Intermediate. Benchmark crude prices are affected by news globally. Gheit estimates that Middle East turmoil has kept the price of crude up $25 a barrel from where it should be. Two additional factors affecting the price of crude are the Iran embargo and the European debt crisis.
Andrew Butter recently published a cycle analysis for the price of oil and concluded that $67 a barrel was were it should go at the next cycle low. Allowing $1.45 for RTDM, that would put the average U.S. gasoline price somewhere around $3.10 a gallon. And the contribution of crude to that gallon of gasoline would be down to 53%. If 63% were maintained as the ratio, gasoline would be at $2.60 a gallon for $67 crude, but it is not likely that the absolute cost for RTDM could come down to near $1, which is what it would have to be at that price.
John Lounsbury contributed to this article.
- Oil Prices fall on retail sales inventories (Shanghai Daily, 14 June 2012)
- Divided OPEC grapples with whether to cut production, prop up oil prices (Steven Mufson, Washington Post, 13 June 2012)
- Daily Fuel Gauge Report (AAA, 16 June 2012)
- Gasoline and Diesel Fuel Update (Petroleum and Other Liquids, 11 June 2012)
- What About $67 Oil? (Andrew Butter, GEI Investing, 8 June 2012)