The headline is a tribute to Jethro Bodine, one of the truly great characters in the history of television, as played by Max Baer. Jethro would tackle fifth grade arithmetic with zeal, and tell Buddy Ebsen about his “cipherin’” and “gezintas”.  As in, 4 “gezintas” 8, two times, Uncle Jed.

   Here is the fifth grade level report on U.S. fuel prices at the moment (set against the backdrop of Boxing Day for all of those Ground Hog Day gifts that are to be returned):

  - - U.S. retail gasoline prices were measured today by OPIS and AAA at $3.47 gal, up 36cts gal from the celebration of the woodchuck in 2011, and some 80cts gal higher than the whistle pig’s moment in the sun in 2010.

  - - The U.S. just concluded the most expensive January for fuel ever, with last month’s average gasoline price at $3.37 gal. In 2011, January delivered an average price of $3.095 gal, and in 2010 the first month averaged $2.71 gal. A typical consumer, purchasing 50 gallons each month, would have paid $168.50 for their fuel in January 2012, up $13.75 from 2011, and up $33 from 2010. Consumers did not behave typically, however. (See comments in the Q&A section for color)

  - - Benchmark West Texas Intermediate crude oil futures begin the post Ground Hog Day at $98 bbl, up about $7 bbl from this time last year. But Brent crude is worth about $113 bbl this morning, and the cost for refiners who bring that crude to the U.S. East Coast is above $115 bbl. That is up more than $10 bbl from last year. (See Q&A for some more color on crude diversity)

  - - Almost all of the major macroeconomic data points suggest that the U.S. economy is in recovery, with fewer jobless claims, more people on payrolls, higher equities prices, brisk car sales, and high travel bookings. But if I were sequestered in a bunker, and perused only the petroleum statistics from the Energy Information Administration, MasterCard, and the American Petroleum Institute, I would be tempted to conclude that the U.S. is in recession.

   U.S. gasoline prices may very well cross the $3.50 gal mark next week, and that puts the typical pump price very close to the average number in all of 2011 - - $3.51 gal to be precise. As you will learn in the fifth grade Q&A, this has everything to do with supply, crowd behavior, money chasing money, and fear; but paradoxically, little to do with demand, which still stinks.  

  Incidentally, in a page borrowed from ExxonMobil’s playbook, I have altered this blog at the molecular level.

February Questions & Answers

Q. Isn’t this unusual to see gasoline prices move higher in January and early February?

A. Yes. The first four to seven weeks of the year usually bring high ratings for NFL football, multimillion dollar box office receipts for Liam Neeson action movies, and brisk sales of snow shovels and cold weather gear. This period is traditionally a time when gasoline prices tilt lower, or remain flat at best.

Q. What makes you qualified to make predictions about spring gasoline?

A. I don’t know who you are. I don’t know what you want. If you are looking for ransom, I can tell you I don’t have money. But what I do have are a very particular set of skills; skills I have acquired over a very long career. Skills that make me a nightmare for people like you. (Sorry, that is actually the classic Liam Neeson speech from Taken)

Q. You’ve predicted that average gasoline prices will probably hit $4 gal this spring. What is behind that prediction?

A. Oil prices are incredibly tidal, with a morphology that resembles the Bay of Fundy. I think we will see a brief chaotic period when the U.S. gasoline distribution system switches from winter gas to summer gasoline, all against the backdrop of low refinery runs. This shift occurs every year. You might say that shift happens in the gasoline business each March, April, and May.

Q. What might breed special chaos this year?

A.  Early February crude prices are higher than they’ve ever been on similar calendar dates through the years. The price of offshore crude is what sets the standard for gasoline futures and that price is around $113 bbl.  Also, we’ve lost a number of refineries in the North Atlantic in the last six months.  These include refineries operated by Sunoco, Hess, PDVSA, and various European countries. Some of those refineries represented the key to a smooth spring transition from winter-to-spring gasoline for the East Coast, and specifically for N.Y. Harbor, the delivery point for NYMEX RBOB futures. Beyond the closed refineries, we have the issue of first quarter refinery maintenance, where companies take “pit stops” in order to upgrade and perform safety work on precious manufacturing assets. Those pit stops can create a wreck in futures markets.

Q. Is there a speculative element to the 2012 gasoline price surge?

A. Absolutely. Demand for physical gasoline has plunged, but demand for paper barrels (futures and options) has never been higher. Bear with me and I’ll explain via some Commodity Future Trading Commission stats.

   The way one follows participation in the paper market is through open interest figures. Open interest hit a record 351,000 contracts last week (each contract represents 1,000 bbl). The long and the short of it is that among large hedge funds and commodity pools, there is nearly $10-billion more money bet on a higher price outcome for gasoline futures than on a lower price outcome. That is the third largest skew of all time, and could suggest that some of the spring chaos is already “priced in” to gasoline futures.

Q. How is gasoline demand doing this year?

A. Motor fuel demand continues to be incredibly anemic, by all measures. The Energy Information Administration (EIA) recorded gas demand of just 7.967-million b/d last week, or less than 335-million gallons each day. It’s not unusual to see demand ease in January and February, but these numbers are lower than we’ve seen in a decade, and weather has been remarkably hospitable for travel through most of 2012.

   Gasoline isn’t the only petroleum product that is in a demand slump. Total petroleum demand dropped to 17.6-million b/d last week. The last time we saw overall U.S. demand that low was mid-May 1999. That month also delivered the first ever Dow Jones close above 11,000, and more importantly, in an incredible coincidence, saw the release of The Phantom Menace, starring Liam Neeson. 

   Conventional wisdom holds that the 4% or even 5% demand destruction that we have witnessed for gasoline demand this winter should give way to lower rates of attrition. The second half of February and early March should see higher gasoline demand. If that doesn’t happen, the predicted spring rally for 2012 may just be the dog that doesn’t bark.

Q. Gasoline inventories are awfully high, aren’t they? Won’t that inhibit a rally?

A. To a great extent, gasoline inventories are meaningless in February and March. We have approximately 230-million barrels of gasoline sitting in bulk storage, and that is a large amount, given demand of less than 8-million b/d.

   But almost all of this gasoline is winter blend, and it represents perishable “brown banana” gasoline in my view. It will have to be flushed from the system to make way for the more expensive summer blends in about 60 days.

  I can almost make a case that high inventories of winter gasoline actually raise the odds for spring gasoline rallies.

  Consider for a moment the analogy I present in this thought experiment.  Jose Reyes, the speedy shortstop that often leads Major League baseball in triples is at the plate, looking to break the record for three-baggers.  On first base ahead of him is our gelatinous New Jersey Governor Chris Christie.  The governor clogs up the base path and makes it much more difficult for a smooth triple to be achieved.

  Immense inventories of winter gasoline clog up the distribution base paths ahead of spring/summer blends.

Q. What are the major differences between winter and summer gasoline? Why is the change such a big deal? Is it a boutique blend?

A. It’s not a boutique blend in the sense that the EPA doesn’t require designated amounts of Aqua Velva or Chanel Number Five. In the winter time, gasoline needs to be very volatile for cold starts, and evaporation is not an issue. That means that refiners and blenders can load up gasoline with cheap components such as butane (remember that gasoline is not an element, and is derived from a number of different hydrocarbons)

   In the summer time, gasoline can’t have the same volatility and evaporative qualities, unless one wants to see ozone inversions like those that exist in Chinese urban areas. So, the cheaper components are out of the question and gasoline that meets the toughest U.S. specifications is difficult for some refiners to manufacture.

   All of the closed U.S. refineries (Sun-Marcus Hook, ConocoPhillips-Phila, Hess-St. Croix) could manufacture the low vapor pressure reformulated blendstock - - or RBOB - - that is the toughest grade to produce in the spring and summer. It is also the specification for the NYMEX futures’ market.  Many European refineries can manufacture the kind of gasoline that the U.S. allows in the winter, but they cannot make the summer blends.

Q. Will there be any real regional hot spots for gasoline this spring?

A. Yes. There is an incredible difference between the cost of crude in the lower 48 states at the moment. Refiners in the Rocky Mountains and the upper Midwest have access to heavy sour Canadian crude. As I write this, those barrels cost about $70 bbl.

  Refiners in the northeast have to depend on North Sea or West African crude cargoes that land at U.S. East Coast ports at about $115 bbl. The difference between the two prices equates to more than $1.07 gal. So, a refiner in Minnesota, Montana, or Colorado may have a break even cost that is more than $40 bbl or $1.00 gal lower than a refiner in Philadelphia or New Jersey.

   The East and West Coasts should be the hot spots this year. One of the most interesting local markets will be Pennsylvania. It just might be one of the first states to eclipse $4 gal, and it is a battleground state in the 2012 Presidential race.

   Note: with differences between inland crude oil and coastal crude that commonly are in the $20-$40 bbl neighborhood, there are all sorts of efforts to move domestic shale oil great distances. The pipeline infrastructure has yet to be built or connected, so barrels are moving via railcars, trucks, and perhaps even rickshaw. Mind your pace, boy. Chop. Chop. 

Q. Does the denial of the Keystone Pipeline impact gasoline prices in 2012?

A. No. Reasonable people can have various discussions about the merits, advantages, and disadvantages of the project, but the Keystone issue can be blamed for 2013 and beyond price environments, but not 2012.

   Presidential politics will see plenty of blame attributed to both parties if we see gasoline prices go up to $4 gal and higher. Republicans will blame red tape and the Keystone denial; Democrats will allege conspiracy among producers and refiners. 

   There is very little a president can do to impact gasoline or crude oil prices over the short term. The president could authorize another SPR sale - - as he did last July and August - - but there is a vast polemic as to whether that action had an impact on 2011 prices.

Q. Will imports and exports play a role?

A. Yes. It looks as though U.S. refiners - -mostly the large complex refiners in Texas and Louisiana—will probably export about 600,000 b/d of gasoline and perhaps 1-million to 1.2-million b/d of diesel through much of 2012. We’ll also import about 500,000 b/d or so of gasoline, mostly into the East Coast.

   The U.S. has become the supplier of choice for much of Central and South America, and that may continue. But high prices breed strange politics, and exports could be a hot button issue during the campaign.

Q. The National Association of Convenience Stores (NACS) said this week that 23 percent of all consumers would change their behavior to save a single cent per gallon? Why are Americans so zealous about saving money on fuel?

A. Many Americans follow local gas prices like I follow the Yankees and the Giants. They may believe that they are exercising discipline and restraint on their overall spending, even if they save 18cts on a gasoline fill-up, only to spend $4.99 on a Starbucks coffee. Savings on gasoline is special. It’s like the $5 you win on a golf course, or the $20 one wins in the office football pool.

   Even more, a motorist that pays $3.49 gal for a Friday fill-up and subsequently sees a $3.45 gal price often lapses into a foul mood.

   I’d compare it to this weekend’s Super Bowl. I root for the Giants, but have no money riding on the outcome. However, if the Giants lose, I will be in a miserable ornery mood for much of next week, even though the outcome had no impact on my financial well-being.

Q. What happens if Patriots’ fans taunt or trash-alk after a victory?

A. I don’t know who you are. I don’t know what you want. If you are looking for ransom, I can tell you I don’t have money. But what I do have are a very particular set of skills; skills I have acquired over a very long career. Skills that make me a nightmare for people like you.