Speaking of the price of oil…part 2

Something really needs to be done.

At some point last week, as Hurricane Ike blazed a notional path for the oil refineries of Texas, Canadian gasoline retailers raised their prices by 13 cents a litre “in anticipation of supply interruptions”. A day or two later, they jumped another 1.6 cents or so. The Hurricane came and went, and despite destroying many a home and business, the refineries survived intact.

This was all known by early Sunday.

As I drove to work this morning, the price still hung around $1.38/litre, precisely the same figure as when the refineries were about to be slammed into submission. With the mayhem on Wall Street causing oil traders to worry about sustained damage to the economy – which could lead to lower oil consumption – a barrel of oil fell about $7, winding up around US$94 or so.

Turning the clock back to August (see prior post “Speaking of the price of oil….” August 14-08), I recall one of our more thoughful readers pointing out that I should think about the supply/demand equation when analyzing the price at the gas pump, and not global pricing per se.

Accepting that theory for a moment, a barrel of oil is down almost US$20 from the August post due to concerns about a recession and the impact that would have on demand. Wouldn’t that same demand premise also drive the price down at the corner station? To the contrary, a litre of gas is actually $0.13 higher than my August post, despite a barrel of oil trading US$20 lower.

Why do prices go up in anticipation of a supply/demand constraint, and yet they don’t fall when the inverse is the case?

In the worst moments of Katrina, a litre of gas shot from about $0.80 to $1.30 over the weekend. The media were advised that retailers needed to charge the same price at the pump as it would cost the oligarchy to replace that litre in the tanks being drawn from beneath the station. There was some logic to that, even if the more expensive fuel hadn’t yet made its way to the Esso at Dupont and Davenport.

This Hurricane season, the cover story is different, and yet the behaviour is the same. Even in the face of a weakening input cost.

Something needs to be done.

MRM