Oil Demand Falls, Prices Go Up

June 12, 2008 at 11:02 pm

It’s getting harder and harder to find actual news amidst the advertisements, but every now and then a few facts slip by. This piece was one of the most interesting I’ve seen in a long time.

It has to do with the price of gas.

From Bloomberg:

“Refiners are managing the crude supply they have on hand because they are worried about weak product demand,” said Tim Evans, an energy analyst for Citi Futures Perspective in New York. “Both gasoline and distillate demand over the last four weeks are down from a year ago.”

Here’s the translation: Demand is down so refiners are controlling the supply they have on hand to prevent prices from dropping.

Doesn’t this go against conventional economics?

Demand goes down, prices are supposed to drop. Aren’t they?

Not if the refiners control the supply.

Note: It’s not OPEC or the Arabs that are the only issue in the supply chain. It is our refiners.

The other piece of insightful information is that apparently another reason for oil holding steady is liquidity in the markets. In other words, the Fed has lowered interest rates, nothing else is going up, so speculators are driving up the price.

Does this sound familiar? The stock bubble? The housing bubble?

Brilliant. The lower interest rates are driving up the price of oil.

I was actually glad to hear that demand for oil is dropping because of the high price. But our current administrations’ approach to use high prices as a wedge to open up more drilling in Alaska will not help lower prices if these are indeed the facts.

If we truly want to lower prices, there needs to be an incentive for the refiners to not “manage supply” to keep prices high.

And how can refiners manage the supply if there is true competition? Doesn’t this imply that the refining business is a monopoly? Another role our government could play is to encourage more competition in the refining industry. In a truly competitive market, refiners would not be able to “manage supply.”