When gasoline prices spiked this
summer, the media was quick to
point their cameras and microphones at every available source, looking
for explanations. Myriad theories were
rolled out and exhausted. When the price
plummeted, the excessive coverage quickly faded.
Some tried to connect the dots to the fall
elections. “While politics make for a wonderful conspiracy theory, the reality is that
incumbent politicians are simply fortunate
that the November elections follow moderate weather months,” says John Barnes,
chairman and CEO of B&R Energy. “The
recent downward correction is tied to
much more than politics.”
Smart Business spoke with Barnes
about the end-of-summer price decline and
what dynamics were in play before the
near-record plunge.
What key factors drove the recent gasoline
price decline?
There are essentially two main factors
guiding gasoline prices in the U.S.
First is the price of oil. It is the principal
component of gasoline.
Second are the market forces of supply
and demand, which can vary in different
areas of the country that require special
grades of automotive gasoline. For example, a few years back there was a ruptured
pipeline that created a shortage of the gas
required in the Chicago market, causing
the price to go through the roof until the
pipeline was repaired.
In addition, we’re at the time of year
when we have mild weather, so customers
are not using much heating oil, and the
summer driving season has come to an
end, reducing demand. Those factors, coupled with a dampening of the economy and
certain speculative forces in the financial
markets that were propping up the price
likely precipitated the current price
decline.
A glance at the futures market for
January and February points toward a
gradual rise back up to the $70 dollar-per-barrel oil mark again over the next
year.
Do increased oil reserves lead to lower gasoline prices?
Not necessarily, because we have limits on
refining capacity. We cannot produce all of
the gasoline the U.S. market demands, so
we have to import some gasoline from other
sources. As we head into winter, some refiners can’t take any oil while they temporarily
shut down to convert their operation to produce more fuel oil for heating. This prompts
a temporary drop in oil prices. They adjust
what they produce depending on the
demand cycles forecasted for the coming
winter, and they manufacture more gasoline
leading into the driving season.
Regional ethanol requirements can also
factor into a price decline, since certain
areas require ethanol in the spring and
summer but not in the winter. Adding and
removing ethanol from the refining
process can create additional oil supply or
shortfalls.
Will foreign oil suppliers be satisfied with
U.S. gasoline selling near $2 per gallon?
OPEC and other foreign suppliers, to a
large extent, aren’t concerned with the
price of gasoline. They care about the price
of oil. To keep their economies churning,
they need to sell oil for at least $60 per barrel. They have proposed actions to keep oil
propped up above that level.
What many don’t consider is that wealthy
oil nations have a lot of their dollar
reserves invested in our economy, so it’s to
their benefit to keep the Western
economies healthy. They don’t want to
price oil so low that they can’t support
themselves, but they also don’t want to
price it so high that it hurts the customers
or drives them to develop alternative energy sources.
How does this impact natural gas for home
heating?
Gasoline prices and natural gas prices are
only moderately correlated. In some areas,
natural gas competes with fuel oil. Certain
electric utilities were designed with flexible systems that can burn either natural
gas or fuel oil, so when the BTU price for
one is cheaper than the other, you’ll see
some fuel source requirements switching
back and forth. Last winter, when natural
gas prices were extremely high, those with
the capability to switch changed to fuel oil,
and as gas prices dropped this summer,
they reverted back to natural gas.
Will the lower prices spur other sectors like
retail and manufacturing?
The record high gasoline prices certainly
impacted, to some extent, disposable
income. But for the average driver who
drives 12,000 miles to 15,000 miles per year,
the difference between $2 gas and $3 gas is
only about $2 per day. In aggregate, this
adds up, but it’s probably not going to
make that much of a difference to the
economy or to the retail marketplace.
On the manufacturing side, anything produced with petrochemicals has been positively impacted by lower prices.
Conversely, most of the chemical manufacturing that uses natural gas has moved offshore because prices have been too high to
sustain domestic manufacture.
JOHN BARNES is chairman and CEO of B&R Energy. Reach
him at (214) 445-6808 or [email protected].