You can no longer call Americans irresponsible energy pigs. Yeah, we're still piggy in that we use a disproportionate amount of the world's energy. We still love our SUVs and pickups the way teenagers like to text.
But since 2008, when gasoline first reached $4 a gallon, our gas gluttony has changed. Ford's average fuel economy has improved by 20% since 2004, for instance, and sales of the up-to-40-m.p.g. Ford Focus are way up. We've even stopped getting in the car to go two blocks to pick up a quart of milk. (Well, maybe you have; I don't own a car.) Weekly gasoline demand is "tepid," says JPMorgan oil analyst Lawrence Eagles, and he expects U.S. demand to fall this year by 100,000 barrels a day, even as the economy expands 2.2%.
Weakening demand should be sending gasoline prices down. So what's our reward for being rational economic actors? How about gasoline once again heading for $4 a gallon--possibly on its way to $5? The price rise will be politicized, but let's explain before we blame.
For starters, there's no shortage of crude oil, so let's not carry on about punching holes in the ground. You could argue that $125-per-barrel prices are drawing out supply. The funny thing is, there was a ton of crude available at $80 a barrel, and domestic production (thanks, North Dakota) is increasing.
There's no shortage of fear, either--fear that Israel is going to try to obliterate Iran's nuclear program, thereby setting events in motion leading to the closure of the Strait of Hormuz, which would choke off about 20% of the world's oil supply. That fear has prompted speculators to pump money into the futures market, the result being a $20-to-$30-per-barrel supply-risk premium in the price of crude.
Consumers are not the only rational actors in this oil drama. Refiners, the folks who crack crude to make fuel, play a part too, and they've responded to weak demand by limiting the supply of gasoline. According to JPMorgan, 19 refineries have shut permanently in the U.S., the Caribbean and Europe since 2009, representing some 1.7 million barrels a day of refining capacity.
The problem is profit. The refiners lost money last year. Tesoro, a big Western refiner and marketer, dropped $124 million in its fourth quarter. How is it possible for refiners to run in the red when retail prices are gushing? It's all about the 6-3-2-1 crack spread. This is not a drug epidemic. Crude is processed into a variety of products along with gasoline--light distillates like naphtha and heavy ones like fuel oil--and it's the ratio and pricing of one product to the others that figure into a refiner's profit. The 3-2-1 means that out of one barrel of oil you get three barrels of gasoline, perhaps two of diesel and one of a by-product. The 6 is a cost multiplier: take the price of oil, multiply it by 6, then back out the production costs of the 3-2-1. What's left over is the crack spread. For most refiners, that spread was negative last year.