[quote=ewmayer;137523]Interesting - but I wonder just to what degree grades like Brent are "nonsubstitutible." At some price point I would expect all but a few customers [say ones who for some reason simply can't refine lower-grade crude at any cost] would simply switch to a lower grade ... but I'm way out of my depth here. Any folks with some background in the oil industry or the refining process reading this?[/quote]The main properties of crude oil that affect its refinability are: heavy (slow-flowing, longer hydrocarbon chain molecules) vs. light (faster-flowing, shorter hydrocarbon chain molecules), and sweet (low percentage of sulfur compunds) vs. sour (high sulfur percentage).

A refinery can't process just any old crude oil that comes its way. If there's a high sulfur content, this means more acidity, and more sulfur compounds that have to be separated out, than in sweet crude. Refinery processing equipment has to be designed to handle a certain range of sulfur content.

Many refined oil products involve splitting ("cracking", in refinery parlance) large hydrocarbon molecules into smaller ones. So, light crude commands a higher price than heavy crude because it needs less "cracking" to produce the desired mix of products such as gasoline. (And, refinery design is affected by the viscosity range it is intended to proceess.)

When I started working in the computing department for (what-later-became-)Amoco in summer 1967, one massive set of programs (on punch cards!) in the process of being converted from their old IBM 704 to run on their new IBM 360 was a series that computed refinery specifications according to the type of crude oil. Each program was for only a certain combination of refinery equipment, and (if I understood correctly) computed what grade ranges of crude could be processed by that particular combination.

Here are two articles from 2004-2005 that discuss crude oil grades:

[URL]http://www.econbrowser.com/archives/2005/08/sweet_and_sour.html[/URL]

[URL]http://www.gasandoil.com/goc/news/ntn44964.htm[/URL]

So, yes, certain grades at the ends of the light/heavy and sweet/sour scales are "nonsubstitutible" for grades at other places on those scales, in that they can be processed by only a certain subset of oil refineries, not by other refineries.

- - -

P.S. Gasoline is composed of relatively small hydrocarbon chains -- it pours and evaporates readily. For an example of how thick the large hydrocarbons can be, look down at the asphalt pavement on which gasoline-powered vehicles are driving!

[quote=cheesehead;137556]But wasn't the "subsidies" reference to China, et al., not to U.S. or Europe?[/quote]

That is precisely my point. the US in its own way massively subsidizes oil by not taxing it like the rest of the world and providing huge taxpayer funding for road networks etc. Also, there is a massive subsidy for air travel through no sales tax and no tax on jet fuel.

So I would argue that the US subsidizes oil just as much as China, just in a different way. If these subsidies were removed you would end some of the distortion which sees the US far more reliant on the car and the airplane than on trains or public transport.

A contrarian argument could be made that Europe overtaxes distillates which distorts the market. After all, 2/3 of the price you pay for gas is tax. This obviously affects the living and travelling habits of all Europeans.

The tax collected on gas in the U.S. is earmarked for highway construction. The huge consumption in the U.S. means the tax collected pretty much pays for federal highway projects. State projects might be argued differently depending on which state you are in.

DarJones

Sure, you can make that argument. But then the low taxes do have an impact on demand, don't they? You can't really talk about subsidies without talking about taxes.

[QUOTE=Fusion_power;137597]The tax collected on gas in the U.S. is earmarked for highway construction. The huge consumption in the U.S. means the tax collected pretty much pays for federal highway projects. State projects might be argued differently depending on which state you are in.[/QUOTE]

Actually, this is no longer true. Since the tax rates are cents per gallon, two factors have eroded this funding. First, inflation has increased the construction costs while the revenue per gallon has remained flat. Additionally, to the extent that it has occurred, the increase in fuel efficiency has reduced the revenue per vehicle mile.

Whereas there used to be adequate Federal funding, the funding burden has been increasingly shifted to the states.

Relevant WSJ OpEd
 

[url]http://online.wsj.com/article/SB121564783168740955.html?mod=opinion_main_commentaries[/url]

[QUOTE]Your claim that any oil we drill for now will not come on line for five years or longer – and will thus have no effect on prices today – is incorrect. Unlike past oil crises, where the spot price of oil (that is, today's price) rose more than forward prices, the oil price for delivery in 2012 is trading at $138 per barrel. The market is sending a clear price signal that our problem is in the future – because we do not have the will to curb demand or increase supply.
[/QUOTE]
...
[QUOTE]The oil market, however, has more than anticipation; it has a well-defined forward price signal. This is a key component of the added $25-$40 per barrel in current oil prices. Congressional hearings and "make it go away" legislation will not stop that. Demonstrate the national will to address the supply and demand issues now and it will.

As forward prices decline, watch how quickly the spot price comes down.
[/QUOTE]

Jim Rogers: Oil speculators are getting killed
 

[URL="http://www.commodityonline.com/news/topstory/Oil-speculators-are-getting-killed-Jim-Rogers-10403-3.html"]Commodity Online | Oil speculators are getting killed: Jim Rogers[/URL]
[quote]By George Iype

SINGAPORE: Investing legend and commodities guru Jim Rogers says crude oil prices have been going up thanks to an unprecedented demand-supply mismatch. He said those who blame speculators for oil price surge do not understand the oil reality in the world.

Talking to [I]Commodity Online[/I], Rogers, who founded the Rogers International Commodity Index, said he has been predicting all these years that oil price would go up because of shortage of supply.

”Some people blame speculation for oil price rise. If it is speculation, when the oil price is too high, the people with oil will drown the speculators. It is just a stupid accusation that speculators are behind the oil rally,” he said.

He asked: “If people have oil, do you think speculators could have driven the prices too high like this?” “No. People are spreading all speculative stories that speculation is driving up oil prices. That is not correct,” the legendary commodities investor and author of such celebrated books such as [I]Hot Commodities[/I] and [I]A Bull in China[/I], said.

He said the truth of the matter is that there is so much shortage of oil in the world. “The shortage of oil in physical market is higher than in the futures market. That is the reason for the high crude oil prices,” he said.

”Those who blame speculators for the high oil prices, I would like to remind them that in futures market every time somebody buys oil, every time the speculators buy oil, the speculators also sell the oil,” Rogers, who is now settled in Singapore said.[/quote]I don't doubt Rogers' expertise in this area, but I do still believe that there is a significant speculative component to recent oil prices - which is of course partly driven by fundamentals in related areas, e.g. the plunging value of the dollar and the slashing of discount borrowing rates [and Treasury bond yields] by the U.S. Federal Reserve. Sure, most speculators do have to quickly turn around and sell the oil futures contracts because they have no physical storage capability - but [B]as long as there is an expectation of continued high and rising prices[/B] [the key to all speculative bubbles, for instance the housing bubble], speculators will be willing to gamble that the odds of prices going up are higher than those of prices going down. The resulting high level of speculative activity leads to a kind of bidder "feeding frenzy" which drives prices up over what they would be in a normal supply-and-demand-driven market condition. If the speculative prices get too out of whack, the bubble inevitably will deflate at some point - the only question is, just where is that price point? Depends on what's driving the bubble, and the overall economic context. In the case of housing, the bubble popped when a condition of [to use Mish Shedlock's phrase] "peak credit" was reached, i.e. where the average homebuyer was extending him-or-herself to their absolute maximum in order to buy into the mania - and the "maximum" was a function of the extremely loose credit conditions that prevailed at the time, i.e. if you had a pulse you get a no-money-down negAm mortgage on an overpriced house and a generous HELOC to accompany it and help you pay your bills while you waited for the price of your "purchase" to balloon enough to put you into the black, at least on paper. When enough folks began saying "this is nuts" and decided to stay on the sidelines in hopes that the speculative mania would ebb, things began to unwind rapidly, and entered the current deflationary-spiral phase. In oil, a combination of reduced demand from hurting economies in the U.S. and Europe, and an eventual spreading of the pain to the emerging economies [mostly in Asia] are what will eventually pop the bubble, but not to the extent of the housing bubble, because oil prices are nowhere as out-of-whack relative to what-fundamentals-would-support as they were in housing.

BTW, the Valero gas prices I've been tracking and periodically posting have leveled off for now - spent several weeks at $4.479/gallon, and fell back 2 cents last week to $4.459. I suspect that is at least as much a function of plummeting demand in the U.S. as it is due to the recent leveling-off of oil prices around the $140/barrel level.

[QUOTE=cheesehead;134554]
You may say: but that doesn't yet explain why pump prices go up immediately even when at the time of oil market price rise the crude oil is still in the slowpoke tanker two months away from unloading at New Orleans. And you'd be right. But I needed to explain the preceding stuff before I started explaining the rest of what's going on ...

(And here I must pause again.)[/QUOTE]Edit: I have been scratching my head over something lately: the loose correlation between crude prices and pump prices. Crude averaged $23.00 per gallon in 2001, while the price of mid-grade unleaded gasoline at the pump averaged around $1.55 per gallon. Crude has nearly sextupled, yet pump prices have not yet tripled. Is $7 a gallon a real possibility if crude prices linger where they are?

There is definitely speculative pressure in the petroleum markets, and in commodities in general. The conventional funds, as well as those hedge funds remaining, are looking for a place to run with their immense sums of capital, and commodities and energy are the only non-frightening places to put cash right now. Sure, oil investors will be hit hard within the next few months, but what else looks good now?

[QUOTE=FactorEyes;137858]I'm puzzled that crude has gone from $40 to $130 a barrel, yet the price at the pump has merely doubled. All this over the past 7 years.[/QUOTE]

Actually, there's a simple explanation for that: The profit margin that oil refiners make by "cracking" crude oil into more-useful petroleum products - the so-called "[URL="http://en.wikipedia.org/wiki/Crack_spread"]crack spread[/URL]" - for gasoline has [URL="http://www.theoildrum.com/tag/crack_spread"]plummeted[/URL] in the past year or so. So, while oil companies may be reporting record overall profits, their gasoline-refining arms are in many cases *losing* money, because they have been unable to pass much of the price rise in their feedstock on to the gasoline purchasers, due to competition and already-sharply-dropping demand. Believe it or not, U.S. retail gas prices would in fact be quite a bit higher than they already are if they truly reflected the price of oil, in terms of containing a typical historical refining profit margin. This margin erosion is the reason many big oil companies are exiting the retail-gasoline business in the U.S.

I believe the reason the crack spreads in jet fuel and diesel have not shown a similar drop as those in gasoline is that the oil companies have the customers for the former 2 fuels "over a barrel", as it were. Truckers still have to ship their wares in the same trucks and airlines [at least the ones that are still in business] still have to fly their routes using their existing planes, whereas U.S. consumers don't have to take long summer-vacation driving trips and don't have to drive the Hummer, if they have a smaller second vehicle they can use instead.

[quote=ewmayer;137861]I believe the reason the crack spreads in jet fuel and diesel have not shown a similar drop as those in gasoline is that the oil companies have the customers for the former 2 fuels "over a barrel", as it were. Truckers still have to ship their wares in the same trucks and airlines [at least the ones that are still in business] still have to fly their routes using their existing planes, whereas U.S. consumers don't have to take long summer-vacation driving trips and don't have to drive the Hummer, if they have a smaller second vehicle they can use instead.[/quote]So, you're arguing that gasoline demand is more elastic than jet fuel and diesel demands, right?

I would have, too, until I saw Figure 3 at [URL]http://www.theoildrum.com/node/4255#more[/URL], which seems to indicate the opposite!

[quote=http://www.theoildrum.com/node/4255#more]Figure 3 indicates that consumption during the first four months of the year dropped by -1.3% for gasoline, -3.9% for distillate, and -3.8% for jet fuels. Other products, not shown on Figure 3 include residual fuel oil, -21.6%; asphalt, -13.1%; and natural gas liquids, -5.8%. Overall consumption of petroleum products decreased -4.2%, which is a huge change. These amounts are calculated on an average daily basis, and reflect the fact that 2008 is a leap year.

Thus, what we are seeing is that gasoline, with a disproportionately low price increase, is holding up better in consumption than other products, with larger price increases. Part of this is the fact that with the lower price increase, Americans have had less need to cut back on their demand. Part of it, too, is that it has been possible to continue to get imports, even with this relatively low price increase, indicating that overseas demand for gasoline is not high, compared to other products.[/quote]I had casually noticed that local diesel prices seemed to have been climbing faster than gasoline, but hadn't really kept track. Reading on after Figure 3 there was an eye-opener to me.

[quote][B]The world market is perhaps beginning to value distillate more highly, relative to gasoline, because of its greater energy content. [/B]

I think part of what may be happening, on a worldwide basis, is a change in the relative value of distillate and gasoline. Gasoline started as the higher valued fuel, but is now becoming the lower valued fuel.[/quote]BTW, regarding "residual fuel oil, -21.6%" in the first quote -- I saw a news report, a few nights ago, saying that many Northeast U.S. homeowners with fuel-oil furnaces have been delaying their stocking-up for next winter because of recent price increases, apparently thinking they might get a better deal later. I think they might lose their gamble, and am glad I'm not a fuel-oil customer.

- - -

FactorEyes,

My intended but long-delayed final installment of my explanation for the price phenomenon questioned by only_human in post #39 three months ago is ... still on my to-do list. It will address why the gasoline price jumps only days after crude price jumps (whereas the processing process takes much longer). However, your edited question in post #162 --
[quote=FactorEyes]Edit: I have been scratching my head over something lately: the loose correlation between crude prices and pump prices. Crude averaged $23.00 per gallon in 2001, while the price of mid-grade unleaded gasoline at the pump averaged around $1.55 per gallon. Crude has nearly sextupled, yet pump prices have not yet tripled. Is $7 a gallon a real possibility if crude prices linger where they are?[/quote]-- is unrelated to the [I]short-term[/I] time correlation between crude price changes and retail gasoline price changes that only-human questioned, and I am not qualified to answer authoritatively. The Oil Drum ([URL]http://www.theoildrum.com/[/URL]), to which Ernst has just linked, seems more qualified (and a couple of decades more up-to-date, though many aspects haven't changed much), than I am about almost anything oil-related.

[quote=FactorEyes;137858]Sure, oil investors will be hit hard within the next few months, but what else looks good now?[/quote]... ummm ... [SIZE=1]gold? [/SIZE]

Or, more seriously, on the Iowa Electronic Markets ([URL]http://en.wikipedia.org/wiki/Iowa_Electronic_Markets[/URL], [URL]http://www.biz.uiowa.edu/iem/[/URL]), maybe the Democratic choice at [URL]http://www.biz.uiowa.edu/iem/markets/pr_Pres08_WTA.html[/URL] (current quote at [URL]http://iemweb.biz.uiowa.edu/quotes/Pres08_quotes.html[/URL] DEM08_WTA bid/asked 0.649/0.682, pays "$1 if the Democratic Party nominee receives the majority of popular votes cast for the two major parties in the 2008 U.S. Presidential election, $0 otherwise") ? 50% ROI in 4 months looks good to me :smile: Please, do consider possible risks there (not the most of which is: Is "CST" intended to be "CDT", or do they have a time machine?).

But I stray off-topic.