Eleven states have now surpassed an average gasoline price of $3.25 gal, and that is a number that I’ve previously indicated represents the tipping point for fuel consumption. Those high priced states - - mostly in the West and Great Plains - - may now see some specific consumer response in the form of lower demand. There are nine other states that almost certainly will also surpass $3.25 gal in the next few days.
States above the tipping point include California ($3.46 gal); Hawaii ($3.39 gal); Illinois ($3.39 gal); Indiana ($3.32 gal); Michigan ($3.38 gal); North Dakota ($3.25 gal); New Mexico ($3.30 gal); Oregon ($3.41 gal); South Dakota ($3.26 gal); Washington ($3.44 gal); and Wisconsin ($3.32 gal). The states that should soon be in the same realm include Connecticut, Iowa, Idaho, Kansas, Utah, Minnesota, Montana, Ohio, and Oklahoma.
Some more numbers.
Today finds another record national average for unleaded regular - $3.129 gal - - and that is up 28.2cts gal in a month and some 20.7cts gal above the same day last year. Another less visible record was surpassed in the last 48 hours. Until now, the most money expended on any one day for U.S. gasoline was $1.225-billion around August 4, 2006 (these numbers are extrapolated since there is no nationwide cash register!). Today Americans will spend about $1.236-billion on gasoline and we will probably hit $1.25-billion early next week. See the end of this blog for an historical perspective on that outlay.
So where do we go from here? Permit me to wax metaphorically.
One of the hottest bestsellers in non-fiction these days is a tome called The Black Swan. Its author eloquently argues that investors and speculators put far too much faith in order than what actually exists in the generally chaotic realm of nature. The metaphoric title, incidentally, refers to the discovery of black swans in Europe many centuries ago, and the damage that discovery did to the reputation of experts that assumed all swans were white.
Various experts in the petroleum business now wonder whether indeed a black swan is visiting our shores, in the form of a new refining paradigm that has replaced everything we’ve witnessed in the last twenty years. Gasoline, exclusive of tax, sold this week for twice the price of many North American grades of crude. Is this the end of the era where gasoline sells for $5-$20 bbl over the price of the feedstock? Are we viewing something we haven’t seen before?
There’s no questioning that this industry has seen experts “cry wolf” often in the last decade. Widespread gasoline shortages - - at the pump - - were predicted after Hurricane Katrina, and then again last May when new ethanol/gasoline mixtures wrought considerable havoc in distribution. Those shortages didn’t occur, thanks to last minute increases in production and noticeable slowdowns in demand.
We did get a vision of the pain that free markets could inflict last year, however, and that vision came in the spot ethanol market. Prices for the spot or incremental barrel virtually tripled in the May through July period when buyers consistently outnumbered sellers. The $5.50 bbl spot ethanol numbers represented a black swan in that regard.
This week is likely to see retail gasoline prices of between $3.00 gal and $3.50 gal across a broad swath of the country. It is also likely to see more erroneous comments that talk of people driving more than ever, despite the high prices. That is not true. Talk to western chain marketers and they will confirm that sales are flattening as consumers begin to tweak buying habits based on $3.30-$3.40 gal prices.
The middle of the petroleum business may also soon respond. Because of the additional 20-30cts gal wholesale price surge, the most pressure-packed job in the industry is occupied by credit managers. An 8,500 load of gasoline required payment of in excess of $25,000 in many cases, and the odds of dealer or distributor checks bouncing have never been higher.
Refiners are certainly the beneficiaries of the higher prices. That doesn’t mean they have acted collusively, but there’s no question that if recent numbers persist, late July will bring earnings’ calls that will see public and private companies pilloried for their largesse. In that regard, what was once dubbed a “golden age” for refining actually has some “golden goose” attributes. An angry Congress is already variously accusing refiners of rigging downtime, deliberately dragging their feet on maintenance, and best of all, refusing to invest in new capacity in order to keep a cap on output. At the very least, there is heavy pressure on refiners to get their processing acts in order.
Moving back to the animal metaphors, one could say that the Wolf is always near the door when it comes to U.S. Summer gasoline supply. The difference between outages and surplus is marginal in the best of times and this year is no exception. The Wolf is always in the front yard but those last few feet of entry should prove arduous.
Postscript: Media frenzy? Let’s look at a contemporary measuring stick for 21st century attention spans. A Google news search of “gasoline shortages” turned up 647 unique results, while a search of “gasoline prices” yielded nearly 19,000 stories. Internet search engines that display the ‘top five’ most popular search categories on their home pages showed the term ‘gas boycott’ taking over a slot formerly reserved for Anna Nicole Smith.
Scorecard - - U.S. Consumer Daily Spending On Gasoline - - May 18 Through the Years
May 18, 2007 - $1.225-Billion
May 18, 2006 - $1.128-Billion
May 18, 2005 - $ 852-Million
May 18, 2004 - $ 769-Million
May 18, 2003 - $ 567-Million
May 18, 2002 - $ 540-Million
May 18, 2001 - $ 641-Million