Have you noticed prices at the pump lately? In my area, gas went from $1.39 per gallon to $1.79, even while crude oil prices are floundering below $40 per barrel.

There seems to be a significant divergence of crude oil prices as compared to gasoline, and it’s indicative of a shift between demand for crude oil and production output of refined products.

Refiners margins have been down recently due to the drop in crude oil. During the fourth quarter of last year, the price of a barrel of crude oil was actually more expensive than a barrel of unleaded gasoline (remember there are 42 gallons in a barrel). That meant that the refineries were paying more for the raw material than they were selling their product for. Hence, the drop in refiner stocks, such as Valero (VLO: chart, web, Y!) and Tesoro (TSO: chart, web, Y!).

Now that oil prices have started to stabilize around $40 per barrel, and refiners have taken delivery of their crude purchased for much higher prices, they’re starting to increase their margins by cutting production.

In the first week of January, refined gasoline totaled 9.1 million barrels per day.  By the end of the second week of January, total production was 8.8 million barrels per day, a 300,000 barrel per day drop in refined products.

Demand has been dropping for the last three weeks, and demand on January 9th hit 8.75 million barrels per day.  So production is just keeping up with demand, and no more.

Gas prices typically lag crude prices by a month; two depending on how futures contracts play out.

Corner Office Commentary

If oil prices continue to trade between 35$ and $40 per barrel for the next two months, I would expect gasoline prices to start to turn the corner and head down at the beginning of February.

The change in refined product output should run its course by the end of this month, so long as more output cuts are foregone.  Even then, once the refiners build margin back into their books, we should see gas prices stabilize.

Oil & Gas gas prices, gasoline, oil and gas, oil prices, refinery, Tesoro, TSO, Valero, VLO

A long time ago, someone once told me that you can monitor the health of your car through the gas mileage.  Not knowing if that was true or not, I started recording all the pertinent data during each fill up: gallons, dollars per gallon, miles driven, etc.  I started this practice when I first bought my Ford F150, and continue the routine today.

I can’t say whether or not monitoring this information can tip a driver off about degrading health of the vehicle, but it does give me some good data to look at for other reasons.

There has been a lot of gum-flapping on the television about the rising cost of gas.  The average in my area is still below $4, but that’s not the case everywhere.  The television anchors will lead you to believe that gas prices alone are forcing people into foreclosure on their home, forcing them to quit buying milk and break, and forcing them to decide which body part or child they’re going to trade in on the next fill up.

Somehow I don’t think it’s that bad.

The data will set you free.

Using my mileage log, I determined exactly how many gallons of gas I burned in 2006 and 2007.    Unfortunately this data is a bit skewed since in 2006 I was doing a lot of over the road travel for the oil business, but I’ll throw it in there anyway.

I suspect that my driving for 2008 will be similar to that of 2007 (I’m not having to drive as much for business these days).  I’ll assume my average mileage will stay the same in 2008 as it was in 2007; on average it was about 16 miles/gallon.

Now, figure the average price per gallon in 2008 is $4 per gallon, vs. $2.71 per gallon in 2007.

If I burn the same number of gallons in 2008, at $4 per gallon, I’ll end up spending $2,948 in 2008 on gasoline for my truck.  Basically an extra $1,000 for the entire year.

I can handle that, and I have enough disposable cash flow to absorb the increase in cost without having to cut costs elsewhere.  I honestly can’t say that the extra $1,000 per year is going to force me to drive any less.

But what if…

But what if I did have to maintain my current costs of $1,994 per year in gas expenses?  Good question.

Obviously I’d have to drive less.  Divide $1,994 by $4 per gallon, and you have the new total gallons burned in 2008 of 498 gallons.  Multiply by the 16 mi/gal average and you end up with 7,976 miles, or a reduction of 32%.

I calculated out that I drive 3,640 miles per year to work, round trip, just under half the 7,976 mile figure to maintain the 2007 gas cost.

Doable, but until the increase in gas price really hits me in the wallet, I probably won’t cut back.

So where’s the tipping point?

Given the numbers above, gasoline is going to cost me an extra $83 per month this year as compared to last year.

That isn’t much considering my entire paycheck goes into savings.  However, I would guess that if I had to pay an extra $200 per month for gas, it would sting a bit, and I might be influenced financially to cut back on my driving.

So that’s an extra $2,400 per year compared to 2007.  What does that mean in terms of price at the pump?

Sparing you the expense of writing out my math, it’s $5.68 per gallon.

So where’s your tipping point?

I’ve had a poll running for the last several weeks, asking readers of The Corner Office Blog at what price they’d actually considering cutting back on their driving.

So far, 42% of the 24 people answering the poll say that we’ve already reached the threshold for pain at the pump.  17% have said that $6 is the threshold, and another 17% say that they’ll pay whatever it takes.

I’ll let that poll run a little longer, but I’d like to ask you:  What price will it take for you to cut back on driving?

Economics, Finance, Travel Economics, gas prices, mileage