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.

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I’ve always been skeptical of the true value of running a vehicle on ethanol. I feel that the next great propulsive fuel must have a net energy content greater than gasoline. Scientifically, this means that the energy content of a given amount of future fuel must be greater than gasoline. Currently, I believe the prime candidate for this is hydrogen.

But I digress. Back to the ethanol farce.

I came across a Consumer Reports revelation from 2006 presenting the results of their gasoline vs. ethanol tests. They ran a battery of tests on a new (2007) flex-fuel Chevy Tahoe, which can run on E85 or gasoline, and found that the SUV’s mileage dropped from 14 mpg to 10 mpg on E85. They went on further to say that the results of this test could be applied to any flex-fuel vehicle, because naturally, ethanol has a lower energy content than gasoline.

Ethanol has 75,670 BTUs per gallon instead of 115,400 for gasoline, which means that you would have to burn more fuel to generate the same amount of energy.

Additionally, if you adjust for the lower fuel economy, it’s also more expensive to fuel up with E85 than with gasoline. The price of E85 was about $2.91 per gallon in August of 2006, so if you adjust for the ~28% decrease in fuel economy, you’re actually paying upwards of $3.90 for a gallon of E85. Compare that to the national average of gasoline, and you can see that the economic attractiveness is not all that great.

But ethanol will lower our dependence on foreign oil… won’t it?

Not so fast.

The government credits vehicles that can run on E85 with about two-thirds more fuel economy than they actually get using gasoline, even though they may never run on E85. For example, the two-wheel drive version of the Tahoe used in the study would normally be rated at 21 mpg. But because it can run on E85, it earns a 35 mpg credit, even though the Consumer Reports shows it achieves 30% LESS fuel economy on E85!

The net effect is that consumers are being lured into buying bigger, flex-fuel vehicles like the Tahoe based on the fuel economy sticker on the window, which is highly misleading.

Couple that with the fact that the majority of the country can’t buy E85, and you’re back to burning straight gasoline…

Sounds like you’re a typical anti-alternative energy guy!

Not really. I’d love to be able to stick it to the foreign oil producers like Chavez and Ahmadinejad. To all up and go cold turkey on oil imports would tickle me to death.

However, I think our science in the United States is being driven more by politics than it is by scientific facts. We’ve bought into the ethanol farce in the name of foreign oil and global warming (another scientific farce driven by politics). Now that we’re burning corn in cars, our politicians can gloat that they’re making “great efforts” to curb our dependence on foreign oil and simmer our influence on global warming.

The average misinformed American consumer buys their plight hook, line and sinker.

Alternative Energy, Economics, Energy, Oil & Gas, Politics automotive fuel economy, E85, ethanol farce, fuel economy, gasoline

Another example of economic short-term memory.

Crude prices are continuing upward, as today Nymex Crude closed just shy of $90 per barrel. But in contrast to previous spikes, we’re not hearing the political sounding board in Washington cry for windfall profits taxes, and the talking heads are not aghast with news of gasoline shortages…

Oil is up 8% just in the few weeks since the Fed cut interest rates to bail us out of the credit crisis, and in the process fueled one of the strongest commodities (pardon the pun) we’ve seen in a long time as the thought of a higher inflation rate suddenly improved.

I find it interesting that even as crude oil is setting new records, gasoline prices have yet to follow suit.

Perhaps this is why no one really cares about the price of oil right not…

Just wait.

Oil & Gas commodities, crude chart, crude oil, gasoline, oil prices, WTIC