I just returned home from a business trip to California and I made a startling discovery. The fuel market is vastly different than before the energy crunch that started back in 2001. For those that know me, I came from the finance world and I have a fascination in the financial markets focusing on the stock exchanges as well as commodities, specifically light sweet crude oil. I have always been interested in the oil markets and it is nothing new for me. I, for one, always maintained a market correction would happen based on the teachings from college business courses, what goes up, will always go down. The quicker it rises, the harder it falls. It was bound to happen. I resisted the hype of $250 per barrel costs, but I do believe the price will rise. As an armchair quarterback, indicators and people I spoke to who are pretty sharp in the industry, the price rise when the economy turns around will be $70-$75 per barrel.
That certainly holds true for today's light sweet crude trading, which closed at a super-low 43 and change yesterday (Dec. 4, 2008). It is the lowest close since 2000, or so the news says, I haven't done my own research on it. The low price of the main ingredient of gasoline has certainly pushed the prices off the highest recorded price per gallon averages in U.S. history. The highest cost for a barrel of light sweet crude peaked at $147. That is right, the price has dropped 70% since the peak in July. The high cost of gasoline and diesel is one major propellant for the recession we are in right now. There are other factors, but energy and gas costs rank up there as people spent less on goods and more on fuel.
Now we are seeing very low prices of fuel, the lowest since 2001. So why is the price of light sweet crude down to 2000 levels, while the cost at the pump is only at 2001 pricing? There is more to pump prices than just light sweet crude barrel costs. Refineries, shipping, and profit margins at the stations all play into the mix.
Refineries are probably slowing down quickly, so they are not making as much gasoline as it adapts to the lower demand. The cost of diesel is still way up compared to 2000-2001, which is an entirely new story. The individual stations are combating two battles, first was that profit margins are reduced when the price shoots up quick and fast like it has over the past four to five years. So they are slow to reduce the price, trying to increase margins and make up for the bad margins that peaked in July. Second, the individual station owner is also facing lower volume, further cutting into profits. It is easy to blame individual gas stations owners but they have a delicate balance to achieve in order to stay in business.
Back to the subject of my recent California trip, the lowest I saw was $1.79 in Newport Beach and an average of $1.93, some stations more and some stations less. This was for 87 octane gasoline. I don't ever remember seeing it above $2.00 for the cheap stuff. I arrive back to Newark, New Jersey and fill up as I leave airport parking. The price for 87 octane at several stations was 1.69. I get over the bridge and back into New York only to find that the price is grossly higher. California used to be around 40-50 cents greater than New York thanks to higher taxes and higher restrictions on refineries and such. But that isn't the case right now, New York stations were $2.20 or so for 87 octane.
Why is that? I haven't really read anything, anywhere that indicates that New York should be higher than California. And believe me, I read everything on the topics. As for New Jersey, it is always one of the cheapest places in the country for gasoline but that has changed in the past year. Whenever there was the AAA report on average gasoline prices during the hot times, New Jersey ranked near the top nearly every time for lowest average cost of a gallon of gas. It has slowly been creeping down the list lately and is even 30-40 cents more than the lowest places.
What has changed that now sees California, who is normally highest in the U.S., with prices near New Jersey and far lower than New York? If you have answers, please share them because I can't figure it out.