Approximately 167 days ago, Americans were paying about $1.613-billion each day for their gasoline. Today is Boxing Day, and I estimate that expense is now $611.5-million and headed still lower.
The $611.5-million comes from a simple arithmetic calculation. Most recent Department of Energy statistics put gasoline demand at 8.867-million barrels per day, or 372.4-million gallons per day if you prefer that measurement. The average price for unleaded regular today is $1.642 gal. I rounded out the numbers and that process yields a per diem charge of $611.5-million. (A similar arithmetic calculation was used for July 11, when we consumed about 392.45-million gallons at an average cost of $4.11 gal)
It took approximately 120 years - -after the invention of the internal combustion engine - - for Americans to spend $1-billion each day on motor fuel. One can quibble about the precise day, but suffice it to say that we moved across that billion dollar threshold around mid-August 2005. We used about 398-million gallons per day in that midsummer 2005 period, or about 26-million gallons per day more than current early winter 2008/9 usage. It would be wonderful if we could attribute the lower usage - -and lower prices - - to discipline and reason and sacrifice, or even technological breakthroughs. We can’t. The ongoing economic malaise represents Numeros Uno through Nueve on any Top Ten list (Once again, I am using Spanish in a not-so-veiled attempt to get invited to the Telemundo studios).
The other Top Ten factor that has brought this $1-billion cost decline is present every year, in one form or another. It is, of course, the phenomenon of Groupthink that leads individuals, trading pools, hedge fund managers, and banks to overreact, misjudge, and misconstrue the very flawed data points that make up the statistical petroleum universe. The group raises the bar, thinks out of the box, grabs the low hanging fruit, and stretches every atom of bandwith to make sure that an overreaction is the norm.
40 Days That Might Not Be Biblical
Oil prices are incredibly tidal. The low tide generally occurs between Election Day and Groundhog Day or thereabouts. We’re on course for that sort of timed bottom at the moment, but within the next 40 days, you will see near-Biblical prophesies that evoke memories of 1998 and 1999. Quite a few pundits will probably declare that U.S. gasoline prices will descend below $1 gal. I am not in that growing fraternity of observers.
The last extended period where we saw average fuel prices of less than $1.00 gal came back in 1998 and 1999 when the Spice Girls were in their artistic prime. That was also the period where Exxon & Mobil “merged” - -in the same sense that Germany and Poland merged in the late 1930’s.
We began the new Millennium with an average gasoline price of $1.2962 gal, according to our OPIS/AAA/WrightExpress database. That number may be reachable in the next 40 days, particularly if 2009 begins with more layoffs and economic misery, and if inclement winter weather keeps working folks off the road. The $1.00 gal mark may very well be breached for the occasional odd duck market - - we already find $1.26 gal in Utah, and some Rust Belt states could move toward $1.00 gal in late January. It would probably take a sustained drop in crude prices to below $25 bbl (the price would have to remain there for weeks, as opposed to days) in order to see $1.00 gal or less nationwide.
But some other multi-year records could be broken before the NFL playoffs conclude. The low nationwide price for the decade is the $1.0769 gal average compiled on December 18, 2001. I think that record will remain intact. But other benchmarks could fall. Gasoline last sold for less than $1.60 gal countrywide on January 23, 2004. It last sold for less than $1.50 gal on the first day of 2004 when the price averaged $1.4842 gal. The last time it sold for less than $1.45 gal was December 31, 2002.
Most of the ebb and flow of prices from January 2000 through July 2008 was all about the perception of petroleum supplies, whether it be at the wellhead or at the refinery level. Since July, the obsession has been with petroleum demand. That obsession will continue through January.
Sputtering Cylinders
It’s not often that pessimism throughout the petroleum community is the pervasive mood during the holidays. Gasoline demand is usually poor in very late December and early January, but the decade has generally afforded producers and to some extent refiners a promising outlook for the new year.
But this year, there are some very gloomy forecasts from the wellhead to the pump.
On the crude oil side, traders no longer seem intimidated by numbers below $40 bbl for WTI, even though such prices render a lot of 21st century oil fields unprofitable. Estimates for 2009 demand destruction for global crude, in fact, have become more pronounced. Goldman Sachs last week prophesied that world oil demand could fall by 1.7-million b/d next year, representing about the most bearish forecast yet. The investment house has a $30 bbl target for first quarter 2009.
The average price for February-July WTI futures at presstime was just barely above $40 bbl. The running price for 2008, in contrast, is still barely hanging on to a $100 bbl plus level ($100.71 bbl to be precise). Barring a new oil war this weekend, the year won’t end with a triple digit average.
The oil refining segment is equally stressed. Prices for Gulf Coast “spot” or wholesale gasoline dipped below 80cts gal this week, and the gasoline “crack” versus sweet crude was a negative $2.75 bbl. The West Coast represented the only market in the country where refining margins could be described as reasonable. Gasoline there fetched 40cts gal or more above futures, putting cracks at about $15 bbl.
Distillate (diesel & heating oil) cracks narrowed appreciably in December and no longer represent a saving grace for processing an entire barrel of crude. Much of November saw distillate fetch a $20 bbl premium to sweet crude. At least $5 bbl of that margin was pared in the last two weeks, even for ultra low sulfur diesel.
Petroleum jobbers and distributors also saw erosion as the holidays approached. Those huge rack-to-retail spreads of 15-40cts gal have yielded to single digit numbers. Pump prices as low as $1.25 gal have brought wholesale-to-retail gross margins below 10cts gal in a huge swath of states.
In short, it’s hard to imagine a more dismal backdrop for energy prices headed into the new year. Many banks and trading companies have written off the first six months of 2009. But the lesson we’ve learned in 28 years of tracking oil prices and trends is that markets turn when the crowd least expects a pivot. Watch for that turn in the first quarter of 2009.