Oil / Gas Divergence

The price of oil has come crashing down in recent weeks, but the price of gas hasn't followed (great chart of this is over at Bespoke).



Why? According to AP Energy Writer John Porrettoe:

The price of gas is indeed tied to oil. It's just a matter of which oil.

The benchmark for crude oil prices is West Texas Intermediate, drilled exactly where you would imagine. That's the price, set at the New York Mercantile Exchange, that you see quoted on business channels and in the morning paper.

Right now, in an unusual market trend, West Texas crude is selling for much less than inferior grades of crude from other places around the world. A severe economic downturn has left U.S. storage facilities brimming with it, sending prices for the premium crude to five-year lows.

But it is the overseas crude that goes into most of the gas made in the United States. So prices at the pump will probably keep going up no matter what happens to the benchmark price of crude oil.

Hey, at least we're back to the longer term mean.



Source: EIA

January Gas Futures Below $1

Finally, some good news (although good, for the wrong reason --- no demand). Per the AP (bold mine):

The unprecedented decline in energy prices has provided some relief to consumers and businesses, it has occurred as the nation dips into recession.

Fewer people have jobs to drive to. Gasoline futures for January delivery closed below a dollar, with optimism about the nation's economic health in serious decline.

It was the first close below $1 since 2006, when gasoline began trading in the current format. When gasoline included the additive MTBE, it last crossed the $1 barrier in February 2004.

Relief at the Pump: Gas Drops Record Amount

Cars.com via Mish's Global Economic Analysis:

Turns out, 33 cents in one week is the biggest price drop in the history of anyone paying attention to the national average price of a gallon of gas. Currently, the national average price is $3.12, according to AAA. With the price of oil below $80 a barrel, this price could come down even more over the next few weeks, bringing $3 gas back into sight.

Source: EIA

Motor Vehicles and Oil

The Big Picture points to an interesting data point which shows how much transportation costs have shifted from the price of the vehicle to the price of fuel...

Whenever we see a strange data point -- something that hasn't happened for decades, its worth noting. Recall in 2005, the US Savings rate first slipped to zero.

More recently, something else unusual happened. Consumers spent more purchasing fuel for the month then they did on vehicles: Drivers Spend More on Fuel Than Cars for First Time Since 1982.

One can clearly see the increased spending on gasoline starting in the late 1990's. More interesting (to me) is that combined outlays for motor vehicles AND gas has not risen substantially.

In fact, spending on motor vehicles / parts AND gasoline / oil (in nominal terms) has grown at a similar level (or even less) than in years past.

The big difference is that money spent on oil ends up in the hands of oil producing countries, while the recent consumer thrift (as it relates to autos) negatively impacts the U.S. economy.

Anatomy of a Bubble?

According to AAA, the price of gas has now dropped 25 straight days. Is this the beginning of a large reversal?


Source: S&P, EIA