Wake me up when September ends

It’s a green day for oil companies.  Gustav came, Hanna went, but Ike brought the spike.  In other news, crude oil dropped to $95 a barrel.  Wait.  What?!

(Disclaimer: This post is in no way attempting to marginalize the loss that many Americans feel after the devastation from Ike or any other storm. We can all help our neighbors here or here.)

The blowhard behemoth that ripped through the Caribbean, cut across Key West, and shattered the Texas shore was the perfect storm.  Ike managed to blow gasoline prices through the roof despite oil prices that haven’t been as low since January (when gas was below $3).  Ike was the third-time charm for oil companies, and, like any good hurricane, the hot air is blowing fast.

But these high gas prices aren’t the doing of oil companies.  They’re actually our fault.

Set the stage
If you came within 500 feet of a gasoline station last Friday afternoon, you probably saw what looked like a re-enactment of the 1970s energy crisis.  I did.  Idling cars for quarter-miles lined up like technicolor ribbons outside of gas stations and spilled onto interstate exits.  That morning before the hype, gas was selling for $3.59 a gallon.  En route to dinner that night, my wife and I saw prices near $3.89.  On the way back, it had climbed to $4.09 – and people were still waiting in their cars.

Oddly enough, CNN reported earlier that day that U.S. oil drilling operations were not in danger from Hurricane Ike – a major factor in previous hurricane-induced gasoline spikes.  In 2005, for instance, Katrina knocked out 25% of U.S. oil production, and $3/gallon gas ensued.

This wasn’t the case for Ike.  Instead, 25% of the gulf’s oil refineries were on temporary shutdown during the storm.  Whereas oil drillers extract crude oil from the earth, refineries process that oil to make gasoline for your car, and then pump it through massive pipes to distribution centers all over the United States.  Our pumps could run dry!

This was the trigger!  Scarcity!  How many times have you heard the phrase “gas shortage” in the last week?

Real numbers
Let’s do some math.  Let’s follow Friday’s newscasts and say that 25% of U.S. oil refinery capacity was shut down thanks to Ike, and let’s be generous and say it was shut down for two weeks.  (Today it was reported that only 19% was affected, but I digress.)  The loss equals 1/104 of a year’s supply, or less than 1%. That means that half-a-week’s-worth of gasoline will go missing during the next two weeks.

According to the U.S. Energy Information Administration, the average American driver uses 500 gallons of gas a year while driving an average of 12,000 miles.  A half a week, then, equals 4.8 gallons and about 115 miles.  According to the reports, you need to conserve 2.4 gallons this week and next before everything normalizes.  2.4 gallons?  That’s it?  You can save that by hypermiling alone.

The sky is falling!
Unfortunately, that’s not what happens with (perceived) scarcity.  Everyone around the water cooler at work is thinking the same thing: “I need to top off my car’s gas tank.”  This is terrible.

Topping off your car’s gas tank (when it’s not empty) is adding artificial demand.  When enough people do this at the same time, artificial scarcity occurs, and prices skyrocket.  Individual gas stations estimate future demand from previous demand, and overloading their patch of earth doesn’t help.

By the way, please leave me a comment if you have failed to find gasoline for your car since Ike.  (Trying at gas stations without electricity doesn’t count.)

Half-empty or half-full?
Think about it like this: If gas tanks all over the country range between empty and full, we can only assume that the average car’s gas tank is half-full.  Comparing everything from Honda Civics to Chevrolet Suburbans, I estimate that the average gas tank holds 16-18 gallons.  By conservative calculations, we can say that half of the average gas tank is 8 gallons.  In comparison, the same U.S. EIA stats say that each driver uses, on average, 9.6 gallons a week.

On average, each driver that lined up for the combustion parade last Friday bought almost a week’s worth of gas in advance.  And, if Ike’s effect is anything like that of Katrina and Rita, then these same drivers will continue to top off again and again – creating more artificial demand.  The worst part is that when we do this, we’re buying more gas than normal at a time when prices are higher!  Whoops!

So, why was everyone lined up for gasoline that – hey, wait a minute!  It’s now $4.19?  Gas was $3.59 a gallon last week!

Scarcity, or perceived scarcity, is a powerful thing.  It created a fear that we won’t have enough.  The good news is that prices should decline significantly once the talking heads on TV start reporting that refinery production is back to normal.  In the meantime, our irrational fears are adding to the profit line of oil companies.  Let’s hear it for $3/gallon gas in time for the world series.

What do you think?
Leave it as a comment, and don’t forget to tell us the price for a gallon of good ol’ 87 octane in your neck of the woods.

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7 Responses to Wake me up when September ends

  1. Anonymous says:

    Gas in Lawrenceville GA spiked at $5.21 a gallon, and I took a picture of gas station in Dalton that had resorted to charging $4.99 a gallon. I was so infuriated, I turned them into Shell’s corporate hq’s. I mean… FIFO people, FIFO. If you paid $3.10 for the barrel, charging $5.10 is only profit margin. Craziness! Jenn

  2. Anonymous says:

    Knoxville Thursday night: $3.67. Friday morning: $3.99. Friday night and Saturday: $4.49 or $4.99. Saturday afternoon: passed many stations out of 87 octane, and as time went on, 89 and even a few with 93 gone.Raleigh Monday: Sheetz was out of 87 and 89 at 11 a.m. Would’ve cost $3.89, but 93 was $4.09. At night, Sheetz, BJs and another station were empty. Shell and BP were selling for $3.99.Jenn used the phrase FIFO, and I agree. But the gas companies say “licking dogs.” What’s that, you ask? Why does a dog lick himself? Because he can.AP

  3. matthewpedia says:

    Acccording to this article, gas stations owners make very little profit on the sale of gas itself. Instead, they make more profit on higher-margin items like potato chips and soda. So, when owners see a mad rush to empty out their supply of gas, they raise their prices to (a) keep from running out and losing the traffic that buys the higher-priced items, or (b) to make up for profit lost from not selling those items.Hmm.

  4. Anonymous says:

    Well written article Matt – one of your best. I’ve missed Matthewpedia!Should I buy a motorcycle to thwart high gas prices? Topic for your next article?-Ben

  5. Emily says:

    As stated earlier, I am in love with this blog, er, blogger.

  6. Emily says:

    Ps. I really have no idea what the price of gas is around here.. my husband takes care of that for me.

  7. Eotena says:

    Well, due to some actual shortages going on here in Ohio because of all the power outages, gas prices have risen to as high as $4.29 as of Tuesday. For a few days there, no one could find a station open and with power. I bought gas last night north of the bad areas for $3.99.

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