Released May 24, 2022 | SUGAR LAND
en
Written by Daniel Graeber for Industrial Info Resources (Sugar Land, Texas)--Energy prices are the largest component of inflation in the U.S., and the record price of diesel could put even more strain on an economy flirting with recession.
Crude oil prices were already moving toward $100 per barrel before the Russian invasion of Ukraine in late February further exacerbated the gap between supply and demand. Apart from crude oil and natural gas, Russia is a major supplier of refined petroleum products. The lack of supply and the resurgent demand in the post-vaccination stage of the pandemic means energy prices will continue to test new highs.
For crude oil, the market is caught between supply-side issues, such as the loss of Russian barrels due to sanctioning, and demand constraints, such as the zero-tolerance COVID-19 policy in China. Those dueling components have kept a lid on price movements as of late. West Texas Intermediate, the U.S. benchmark for the price of oil, peaked at $123.70 per barrel more than two months ago, on March 8. It's now around $110 per barrel.
For refined products, however, it seems like the sky is the limit. Travel club AAA reports a national average retail price of $4.60 for a gallon of gasoline, an all-time high. Diesel is off the recent high of $5.58 per gallon, set May 18, but only by a couple of cents. The East Coast, however, is getting hammered -- diesel is $6.52 per gallon.
Last year? Diesel in New York averaged $3.23 per gallon.
Profits for companies dealing in upstream operations--namely oil and gas exploration and production--are driven by the global price of oil, save for expenditures and taxes. In Texas, that means more jobs in the oil patch as big oil companies capitalize on higher prices.
Downstream is a bit different. Profits come from the difference between the price of oil and the price of the products derived from that oil. That's called the crack spread--crude oil is "cracked" into products such as gasoline and distillates, a product category that includes diesel.
Refiners make money off the crack spread, and sometimes the products are more expensive than the oil. Analysts now are suggesting product prices are around $150 on a barrel-equivalent basis.
A lack of refineries only makes matters worse. The lack of refining capacity in the East Coast, referred to in the industry as PADD 1, and the level of consumption there explains why New York state is trying to cope with $6 per gallon diesel. The major refinery in the region, Philadelphia Energy Solution's 100,000-barrel-per-day facility, closed in June 2019 after a major explosion.
Consumers already are seeing their discretionary cash dwindle due to the high price of gasoline, yet demand is holding up. That may be because of the lingering afterglow of pandemic stimulus. But because diesel drives commerce, however, more of the high price of commodities will trickle down to the consumer level by way of inflation in everything from clothes to groceries.
First-quarter GDP was negative, and fears are that a recession is looming. Consumer spending drives the bulk of the U.S. economy and, with inflation running at a 40-year high, spending will eventually falter.
Meanwhile, the supply-side issue is only getting worse. For the week ending May 13, the federal government reported that both gasoline and distillate fuel production declined. For storage, commercial inventories of gasoline are 1.2% below year-ago levels and 6.7% lower than last year for distillates.
Proponents of the domestic energy sector have suggested the White House should do more to improve production to help offset higher commodity prices, rallying around the banner of so-called energy independence. But it doesn't work that way. Like gasoline, the cost of crude oil is the single largest factor behind the price for diesel and the cost of crude oil is a global, not a domestic, issue. For related information, see May 19, 2022, article -- Alberta: We Hold the Cards for U.S. Energy Security.
Cable news broadcaster CNN reported Monday that the Biden administration is considering tapping into a rarely-used strategic stockpile to mitigate prices. That reserve, however, is small. The nation's Strategic Petroleum Reserve is holding some 420 million barrels of crude oil, but the diesel stockpile is closer to 1 million barrels. That's nowhere near enough to have any meaningful impact.
"It's small potatoes," Andy Lipow, president of Lipow Oil Associates LLC (Houston, Texas), told CNN. "It might buy a couple of weeks or even months, but it doesn't solve the underlying issues."
Industrial Info Resources (IIR) is the world's leading provider of market intelligence across the upstream, midstream and downstream energy markets and all other major industrial markets. IIR's Global Market Intelligence Platform (GMI) supports our end-users across their core businesses, and helps them connect trends across multiple markets with access to real, qualified and validated project opportunities. Follow IIR on: LinkedIn.
Crude oil prices were already moving toward $100 per barrel before the Russian invasion of Ukraine in late February further exacerbated the gap between supply and demand. Apart from crude oil and natural gas, Russia is a major supplier of refined petroleum products. The lack of supply and the resurgent demand in the post-vaccination stage of the pandemic means energy prices will continue to test new highs.
For crude oil, the market is caught between supply-side issues, such as the loss of Russian barrels due to sanctioning, and demand constraints, such as the zero-tolerance COVID-19 policy in China. Those dueling components have kept a lid on price movements as of late. West Texas Intermediate, the U.S. benchmark for the price of oil, peaked at $123.70 per barrel more than two months ago, on March 8. It's now around $110 per barrel.
For refined products, however, it seems like the sky is the limit. Travel club AAA reports a national average retail price of $4.60 for a gallon of gasoline, an all-time high. Diesel is off the recent high of $5.58 per gallon, set May 18, but only by a couple of cents. The East Coast, however, is getting hammered -- diesel is $6.52 per gallon.
Last year? Diesel in New York averaged $3.23 per gallon.
Profits for companies dealing in upstream operations--namely oil and gas exploration and production--are driven by the global price of oil, save for expenditures and taxes. In Texas, that means more jobs in the oil patch as big oil companies capitalize on higher prices.
Downstream is a bit different. Profits come from the difference between the price of oil and the price of the products derived from that oil. That's called the crack spread--crude oil is "cracked" into products such as gasoline and distillates, a product category that includes diesel.
Refiners make money off the crack spread, and sometimes the products are more expensive than the oil. Analysts now are suggesting product prices are around $150 on a barrel-equivalent basis.
A lack of refineries only makes matters worse. The lack of refining capacity in the East Coast, referred to in the industry as PADD 1, and the level of consumption there explains why New York state is trying to cope with $6 per gallon diesel. The major refinery in the region, Philadelphia Energy Solution's 100,000-barrel-per-day facility, closed in June 2019 after a major explosion.
Consumers already are seeing their discretionary cash dwindle due to the high price of gasoline, yet demand is holding up. That may be because of the lingering afterglow of pandemic stimulus. But because diesel drives commerce, however, more of the high price of commodities will trickle down to the consumer level by way of inflation in everything from clothes to groceries.
First-quarter GDP was negative, and fears are that a recession is looming. Consumer spending drives the bulk of the U.S. economy and, with inflation running at a 40-year high, spending will eventually falter.
Meanwhile, the supply-side issue is only getting worse. For the week ending May 13, the federal government reported that both gasoline and distillate fuel production declined. For storage, commercial inventories of gasoline are 1.2% below year-ago levels and 6.7% lower than last year for distillates.
Proponents of the domestic energy sector have suggested the White House should do more to improve production to help offset higher commodity prices, rallying around the banner of so-called energy independence. But it doesn't work that way. Like gasoline, the cost of crude oil is the single largest factor behind the price for diesel and the cost of crude oil is a global, not a domestic, issue. For related information, see May 19, 2022, article -- Alberta: We Hold the Cards for U.S. Energy Security.
Cable news broadcaster CNN reported Monday that the Biden administration is considering tapping into a rarely-used strategic stockpile to mitigate prices. That reserve, however, is small. The nation's Strategic Petroleum Reserve is holding some 420 million barrels of crude oil, but the diesel stockpile is closer to 1 million barrels. That's nowhere near enough to have any meaningful impact.
"It's small potatoes," Andy Lipow, president of Lipow Oil Associates LLC (Houston, Texas), told CNN. "It might buy a couple of weeks or even months, but it doesn't solve the underlying issues."
Industrial Info Resources (IIR) is the world's leading provider of market intelligence across the upstream, midstream and downstream energy markets and all other major industrial markets. IIR's Global Market Intelligence Platform (GMI) supports our end-users across their core businesses, and helps them connect trends across multiple markets with access to real, qualified and validated project opportunities. Follow IIR on: LinkedIn.
