With gas prices at their lowest in years, "Black Friday" could be "Bleak Friday" for the oil companies ...
The average price of gasoline will likely drop below $2 a gallon in San Diego by Thursday or Friday morning.
Today's average price of $2.02 a gallon for regular unleaded is the lowest gas price since January of 2005, when gas prices cost less than $2 a gallon (see statistics below).
What's odd about this trend is that right now the oil companies are actually losing money selling gasoline. At noon today, a barrel of oil was selling on the NYMEX for $54, while a barrel of gasoline on the Los Angeles Spot Market was selling for $48.
In other words, California refineries are losing about six dollars for every barrel of gasoline they produce. What's more, this trend has been going on for well over a month.
So what's happening? Why are oil companies losing money?
We asked analyst and 30-year oil veteran and industry analyst Bob van der Valk that question, and he replied "One Word: LIFO."
LIFO, of course, is an acronym for "Last In, First Out." And what Mr. van der Valk meant was that the last barrels into the refinery were priced at $54, so the price of gasoline is based on the price of the "last barrel in," which means $54 a barrel instead of the $147 a barrel price of July 3rd, 2008, when gasoline in San Diego cost $4.60 a gallon.
That answer isn't a very satisfying explanation. Because ... as we have already observed, the refineries are selling their gasoline for less than the cost of the last barrel of oil. And as we know, oil companies don't usually make a practice of losing money on gasoline. Yet according to the New York Times and the American Petroleum Institute, that's exactly what's happening (and their explanation isn't very satisfying either).
Another plausible explanation is that demand is down ... way down.
According to AAA, demand for gasoline is actually up 1.9% over September, but this is probably a short term trend. Nationally, the the Department of Energy says demand is down 3% overall and that the trend will likely continue. In San Diego, freeway traffic has dropped by four to eight percent. In commodities like gasoline, a 3% drop in demand is enormous, but it still doesn't explain why U.S. refineries are over-producing gas and losing money on every gallon they produce.
Could LIFO also mean "Lower In Fear of Obama?"
Call us jaded cynics but we think that in this case LIFO ought to stand for "Lower It For Obama." The "Fear Obama" strategy is simple - keep oil prices low until everyone forgets about the devastating economic impact of $147 oil. By maintaining artificially low prices, the American economy gets a shot in the arm while remaining addicted to oil.
After all, every junkie loves a shot in the arm - especially when the cost is low.
With oil prices as "low" as they are, many alternative sources of oil or other hydrocarbons, such as soybean oil for diesel trucks, ethanol, and alternative technologies such as steam extraction are completely unaffordable. According to the Arizona Republic, oil billionaire T. Boone Pickens has stalled his plans to create massive wind farms because of the current low price of natural gas and oil.
Viable alternatives to traditional oil cost much more than the sweet crude that we are hooked on. According to the Wall Street Journal, the "lifting" cost for a typical barrel of oil ranges from $5 to $15, with some Middle-East countries capable of producing sweet crude for as little as 50 cents a barrel. Meanwhile, the lifting cost for Syncrude oil from the Alberta Tar Sands is at least $25 a barrel. It costs even more to extract oil from coal, or oil shale, but these technologies were all viable (not to mention green technologies, like solar) when oil cost more than $80 a barrel.
Right now, all of those technologies - technologies that could lead us to energy independence - are imperiled.
But given the long-term economic, political, and moral consequences of buying oil from people who hate us, it might make make sense to reject cheap oil and start breaking our addiction now.
As for the money the oil refiners are "losing?" Don't worry. In most cases, the big oil companies are vertically integrated - meaning that they are selling their own oil to themselves at a handsome profit. So while they are "losing money" on the "downstream" where the gasoline is sold, they are still profiting handsomely ... on the upstream.
San Diego GASOLINE STATISTICS: (Source: UCAN Gas Project)
The last time gasoline in San Diego cost less than $2 gallon was in January of, 2005 when gas bottomed at $1.98
San Diego gasoline reached its all-time high of $4.62 a gallon on June 17, 2008.
Cost of gas today, 11-26-2008 = $2.02 a gallon
Cost of gas 7-days ago = $ $3.37
Cost of gas 1-month ago = $3.11
Cost of gas 4-months ago, July 27, 2008 = $4.29
Cost of gas, this day, 2007 = $3.39
Cost of gas this day, 2006 = $2.51
Cost of gas this day 2005 = $2.49
Cost of gas this day 2004 = $2.45