Thank God for bankers, insurance conglomerates and credit executives of all shapes and sizes.  If not for the questionable behavior of the folks who brought you credit default swaps and questionable financial engineering,  the 24 hour media cycle might be focused on $5 gal gasoline prices, bagged pumps, and the occasional line for gasoline.

  Everyone loves to demonize members of the gasoline supply chain.  If you listen to motorists talk about gasoline prices, you might conclude that gasoline marketers not only club baby seals, they urinate on them after the deed is done. 

   I hosted a conference call today where I made the distinction between “wet barrels” or real physical petroleum supply, and paper barrels, which are represented by futures and options. The paper market continued its rapid descent today, with crude plunging to about $92 bbl and with gasoline futures (for October delivery in New York Harbor) sliding to about $2.40 gal.

  (Speaking of “wet” and I’m not making this up:  On the conference call, just as I started to delineate the difference between paper barrels and the “wet” market, I spilled a twelve ounce Diet Coke on my desk and person. This occurred about 45 minutes into a 90 minute phone call and would have provided a wonderful visual aid, had the “wet” reference been included by video. I wonder if this ever happens to Boone Pickens, or Daniel Yergin, or Samuel Bodman.)

   Less than a week ago, I noted that the actual physical, cash, spot or “wet barrel” prices for gasoline at the Gulf Coast moved into apoplectic, or petroplectic territory. We saw Gulf Coast gasoline exceed $4.70 gal last Friday, for example.   Today, the spot or “wet barrel” price dipped to less than $3.00 gal at the Gulf Coast. It’s still about 40-50cts gal above the paper market (the futures) but the $2.00 gal premium to futures has been quartered. The edge of wetness has moved closer to the paper surface, in other words.

  The good news: this means that you’ll see those $5.00 gal gasoline price signs coming down.

   The bad news: You’ll probably see some of the lower prices drift higher. And you have yet to see the maximum manifestation of the Gustav/Ike supply problems downstream. Supply outages will be routine in many parts of the country - - particularly those that are served by Gulf Coast origin pipelines --  in the next ten days or so.

  In summary: Retail prices will be close to $4 gal in many parts of the country in the immediate future – they are about $3.85 gal as I write this.  The paper markets suggest that retail gasoline will be around $3.00 gal in November and December. That makes some historical sense: the last time crude oil was at $92 bbl, we were paying $2.995 gal on average for unleaded regular and $3.40 gal for diesel. 

  October is anybody’s guess.

   And don’t think for a moment that the futures market is currently responding to market fundamentals, geopolitical headlines, or any real solid dependable analysis of supply and demand for late 2008.  The futures market became untethered to reality on the way up, when financial companies bet huge amounts on $150 bbl oil and sky-high priced refined products.  It never stopped for a moment of stability and has now become untethered on the down side thanks to panic selling, margin calls, concerns about debt, and a flight from paper assets.

   The nice thing about the oil business is that it is a real business. Companies deal mostly in very tangible, but controversial realities --  for the most part, with physical or wet barrels. If companies are big, they may be clumsy, but they generally succeed in getting fuel to their customers even when challenged logistically because the business plan is quite simple.

  The financial arena strikes me as a segment where companies aren’t just too big to fail – they are too big and convoluted to succeed.