Crack Down

April/22/2008 16:02PM
3 interesting comments, join the discussion
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How did you like that $120 oil price today? It’s killing the stock market. It’s killing the dollar. It’s killing the airlines. It’s killing jobs in this country. Did you hear anything from the three candidates? No. Silence. Why? First, it’s a minefield. They have all been lying to you about the future of energy. They have no answers. And, any answers they might have would be inappropriate on Earth Day. Feeling real green today? As I said in yesterday’s entry, your elected officials are planning to dump more on you with the carbon cap that might mean $1.2 trillion in cost increases for energy in the US. We are truly clue less in this country. If you want to sign a petition against the carbon cap go to www.grassfire.org.


Now, let’s talk crack. Not the stuff that you buy in the hood, but refining crack spread. Let’s say you make candles. Your main purchase is wax. You put a dollars worth of wax in every candle and sell your candles to wholesalers for $1.25. Nice margin. But, that was last fall. Now, your wax cost is $2.00. But, your wholesaler says he can’t get the retailers to pay more for candles since they can still live off inventory of candles they bought for $1.50. Do you keep making candles? The crack spread is the margin the refiner makes between his crude cost and the wholesale price of gasoline. Last year the crude price was $60 and the refiner had a huge spread of $20 and it actually went to $30 in May 0f 2007. These are all in barrels. There are 42 gallons in a barrel, so do the math.


Today that is $16 a barrel. We import 6 million barrels a day of finished product. The retail price of gasoline lags the price of crude going up as everyone lives on inventories. This is very bad news because refiners are going to find a way to raise prices or cut production until prices catch up with crude costs. Just like you would do as a candle maker. Gasoline imports en route to the US were probably contracted before the last round of crude increases. But, the buyer sees the opportunity to make even more since crude prices have gone up. Those barrels will go above the price the refiner will get on the spot market. This will push up the spot market. This will push up the retail price to reflect the new price of crude. 


What does this mean. Four dollar a gallon gasoline this summer is a done deal. There is absolutely nothing that will change that. Probably, $4.50 is more accurate. If crude goes up some more, maybe $5. 


Why worry, it’s earth day, my nephew’s birthday, go hug a tree.  

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Comments (3)

  1. Ken Dozier says:

    I hate Earth Day. I just got the invoice from my Arborist to feed all my infected damn trees, which I thought would look nice on my lot, but I think I would rather go out there and cut them down.

    Perhaps I should start growing corn and get a government subsidy for it. Better yet, maybe I can hold them hostage, and then call some environmentalist and see whether they would pay me a ransom to not take a chain saw to them?

    Please send money in care of Ken to http://www.saveatreefromachainsaw.com

  2. Bill Robertson says:

    Settle down Ken. Violence is never a good solution. Just keep getting active. In this one it cuts across party lines and class lines. Our blue collar friends could have a lot of good paying jobs if we get aggressive about energy independence.

    Bill

  3. Bob Fidler Sr. says:

    1st time on your Blog, Terrific comments on the Oil issue,You really do know the industry,Looks like Am/Pm is one way to make it. Bob

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