Sunday, July 22, 2007

Really bogus story on high gasoline prices in NY Times

I'm still generally supportive of news coverage by The New York Times, but they do manage to print way too many really misleading and biased stories. The latest was an article by Jad Mouawad entitled "Gas Prices Rise on Refineries' Record Failures" which provides a very misleading account of why retail gasoline prices are so high and overall is more of a mouthpiece for the promoters of energy and commodities speculation and merely repeats the promoters' "story" that high prices are due mostly to refinery outages (and higher crude oil prices.) The story is grossly superficial, not really new news anyway, and does absolutely nothing to dig down and challenge the veracity of the "stories" being touted by Wall Street "analysts" and others who have a financial vested interest and conflict of interest in having people believe the stories.

Rather than pick the story apart line by line, I'll highlight one data point which essentially proves that refinery outages couldn't possibly even come close to explaining the dramatic rise of retail gasoline prices at a national level. Here is what the article says:

As a whole, refining disruptions have been considerably higher than in previous years: they averaged 1.5 million barrels a day in the first quarter, compared with 700,000 to 900,000 barrels a day from 2001 to 2005. In the days after the hurricanes, refiners were forced to briefly halt as many as five million barrels of production.

To anybody who knows nothing about the business, a shortfall of "1.5 million barrels a day" in refining capacity might sound like a really big deal, except for the fact that available inventory levels of retail gasoline (as reported weekly by the Department of Energy's Energy Information Administration (EIA) having been running consistently above 200 million barrels for this entire period, way more than enough to cover even a 1.5 million barrel a day shortfall. If inventories weren't able to cover the shortfall, we would see inventories declining dramatically over time. Yes, inventories are 4.5% below a year ago (but only by a mere 9.5 million barrels), but that further proves that refinery shortfalls are not causing inventories to be drawn down in a dramatic way. Multiply 1.5 million per day by 90 days and you get 135 million barrels. The EIA data proves that gasoline inventories have not been depleted by 135 million barrels. In other words, the loss of production due to outages did not result in a shortfall of available gasoline. In other words, there was no supply shortage. Sure, demand is rising, but only at a low annual rate (the latest EIA report says "Over the last four weeks, motor gasoline demand has averaged over 9.6 million barrels
per day, or 1.3 percent above the same period last year.
")

The Times article cavalierly states:

Many factors have led to the rise in gas prices, including disruptions in oil supplies from places like Nigeria and Norway. But analysts say the refining bottleneck in North America has been one of the main drivers of higher energy prices this year.

But they make no mention of the role of speculation on the futures markets. They reference "analysts", failing to mention that the firms employing most of those "analysts" have a vested interest in perpetuating "stories" to incite higher levels of speculation in energy futures.

Curiously they refer to the "refining bottleneck" as only "one of the main drivers." Well, either this so-called "refining bottleneck" is the main driver or it isn't, and if it isn't the main driver, then what is and why doesn't the story focus on it instead? I suspect that when pressed, they would point to higher crude oil prices. But if higher crude oil prices are the main driver, why even bother mentioning secondary or even tertiary drivers that may only account for a few pennies a gallon at most? The bottom line here is that the whole story (both the "analysts" story and the Times story) is rather fishy to say the least.

Even if you buy the story that high crude oil prices are the main driver (which isn't the story being peddled here), that raises the question of what is really going on with regards to both supply and price of crude oil. The quote above does blame part of the rise in gasoline prices on "disruptions in oil supplies from places like Nigeria and Norway", but even that is simply yet another "story" being peddled by "analysts" and others who have a financial vested interest and severe conflict of interest in perpetuating "stories" that even when true paint a very misleading big picture. Once again, we can consult the weekly EIA data and prove that the so-called "disruptions" have had no detectable impact on the overall availability of crude oil as an input to refineries or other uses. The EIA weekly reports have reported domestic crude oil inventory levels of well over 300 million barrels for an extended period of time, way more than enough to cover any Nigerian or Norwegian "shortfall" for an extended period of time. Not to mention the fact that the U.S. has 690 million barrels of crude oil sitting in the Strategic Petroleum Reserve precisely for any significant "supply disruptions." In fact, the current crude inventory level is 5.4% above a year ago, at 352 million barrels. This is very compelling proof that even if there is a shortfall from any number of individual suppliers, there is way more than enough oil sitting in inventories to make up for any shortfall. If the so-called "shortfalls" were truly significant, there would have been a dramatic drawdown of inventory levels, and there has been no such drawdown. This is truly compelling proof that there is no fundamental reason for high crude oil prices and hence no fundamental reason for high gasoline prices.

There is in fact a single "culprit" behind higher energy prices: "the world is awash in liquidity." Put simply, there are too many people with too much money and the stock and bond markets are not providing high enough rates of return, so vast amounts of money are flowing into the commodities markets. Even individual investors are seeing stories chiding them that commodities should be a part of any investor's "portfolio." ("Oil is going to $100! [or is it $200?]) It is that money which is bidding up the price of crude oil and gasoline. And Wall Street and so many of the so-called "analysts" are providing the drumbeat and siren song urging people to put their money into these commodities, exactly as they had done with MBS leading up to the so-called "subprime crisis."

Why the Times does not cover that story is rather baffling. I simply do not know whether they are knowingly participating in the obfuscation of the true story, or merely suffering from incompetence, negligence, and basic laziness. Either way, we readers and consumers suffer the consequences. Ditto for Congress, a Democratic Congress no less, for their turning a blind eye to this sad story.

-- Jack Krupansky

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