QE3, SPR Release and Gasoline Prices

EconMatters's picture


By EconMatters


With crude oil accounting for 65% of the price of gasoline, there's typically a high correlation between the price of oil and gasoline. However, there's been a disconnect between the two for the most part of this year. The main reason for the disconnect is the divergence of supply market fundamentals. 


Chart data source:  US EIA



As the two charts below illustrate, while domestic crude oil supply remains way above the 5-year average, the gasoline supply is actually a lot tighter by historical norm, primarily due to some domestic unscheduled refinery accidents/outages, refinery closures in the Atlantic Basin leading to an increase in gasoline exports from the US.


U.S. Crude Oil Stocks Graph.


U.S. Gasoline Days of Supply Graph.




To make things worse, on top of the already tight domestic gasoline supply, Fed picked a nice “political” timing to launch its infinite QE3.  On September 13, 2012, Helicopter Ben has pledged an open-ended $40 billion a month MBS bond purchasing program, while holding the fed funds rate near zero at least through mid-2015. 


The likely eventual consequence of this unlimited money printing operation – Dollar debase and the artificial price inflation of almost everything from commodities (including Oil and Gasoline) to stocks, and consumers end up paying the price.        


For now, Brent dropped 4.5% last week, while U.S. WTI crude also lost 6.2%.  Oil has been held down primarily by slowing global economic growth and the dismal demand outlook. 


Meanwhile, the national average gasoline price also saw a nickel a gallon decrease from a week ago, according to the AAA automobile club.  Nevertheless, the current national average --$3.805 a gallon for regular gasoline -- is still 8% above a year ago level and fairly close to where they were in 2008 before the financial crisis. 


Gasoline has always been a hot topic during any election year.  In fact, interesting exchanges have already taken place between White House, G7, and the IEA regarding a potential SPR (strategic petroleum reserves), with a clear divide between the oil industry experts (IEA) and politicians (White House, G7, et al).  IEA’s position was that oil markets were currently well supplied and there was no reason to release SPR.  


With Obama’s re-election on the line, and to counter the potential effect of artificial price inflation by QE3, an SPR release attempting to bring down oil and gasoline prices would be the politically correct move by the White House.     


As predicted in our previous analysis, domestic crude oil inventory could continue to build even from the current high level.  From a global supply standpoint, Saudi Arabia reportedly has pledged to pump around 10 million barrels of crude a day in a bid to cut the price of Brent crude to around $100/bbl.  These factors should further weaken the justification of an IEA-coordinated oil release like the one from last year. 


However, even if there’s an SPR release, unilateral by the U.S. or not, it will unlikely have as significant impact as people might expect on gasoline prices due to the diverging supply fundamentals discussed here.  Think it could be a good idea to cosider a strategic gasoline reserve as well?   


©EconMatters All Rights Reserved | Facebook | Twitter | Post Alert | Kindle

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Joe Davola's picture

If there's real concern over how the pump price is impacting the consumer, gasoline taxes could be cut.

JohnFrodo's picture

Its time for a national hydrogen reseve, and in the meantime we already have a national natural gas reserve. So why are 18 wheelers not being converted, why are goverment fleets not mandated to use natural gas? Oh could it be undue influnence. The SPR no longer makes any sense, gas may become expensive but with Canada and Mexico supplying dependable oil, sell the fucker and use the money to purchase a ticket to the future.


onlooker's picture

I think it was about 1960 a bag of potatoes was 10c, hamburger was 25c, cigarettes were 25c, a decent home in L.A burbs was $10,000, and gas was 25c.

shovelhead's picture

Why stop there? Nationalize everything.

If you like Obama as Prez, you'll love him as your employer and landlord as well.

Those really smart folks in Govt. service will take good care of you.

Serfin' USA!

shovelhead's picture

Why stop there? Nationalize everything.

If you like Obama as Prez, you'll love him as your employer and landlord as well.

Those really smart folks in Govt. service will take good care of you.

Serfin' USA!

boiltherich's picture

Fine by me, better than the blood sucking leeches on our society called the 1% job creating fuctard fat assed cat strangling crony capitalist repukes that are the real parasites on our economy.  There are more ways to get things done than to lick the buttholes of the uber rich nazis that act like spoiled little bitches that will shut the economy down unless they get their own bullshit way!

Two can play at your game S-head.

boiltherich's picture

It is political.  Supply constraints could explain some of it but no more than a few cents, and the dollar explains none of it because the dollar is the same for oil as it is for gasoline.  I have watched gasoline in the last few days shooting up 5, 7, and this morning 10+ cents per gallon even as oil drops, these are several standard deviations above what they should be in any situation barring war in the ME.  The difference between what gas is and what it should be with oil around 90 is now about 62 cents per gallon. 

Also, the rack to retail level, which is the difference between the wholesale price at the refineries, the rack where distributors load the gas onto the trucks that bring it to your local stations, and the retail, or pump where you buy it from them, is the highest I have ever seen it in years of monitoring it.  Where it used to be 10-30 cents and at a couple of pivot points each year when they changed over from one blend to another, it actually used to go negative with retail actually lower than wholesale, the last time I saw that was in 2006. 

It now stands at about $1 per gallon and sometimes lately a little more. 

And there is one thing that industry can do to unseat a president they do not favor, high gasoline prices are the universal barometer of mood in the country, the higher they go the more discontent among voters.  And keep in mind that after banking there is no industry with more rapacious greed than oil.  If those fuckers can't/won't provide the basic fuel of the economy at a profitable but FAIR price then they should not be allowed to participate, to hell with SPR releases - NATIONALIZE refining if not the whole industry. 

People complain about crony capitalism, and the power corporations have stolen from the republic which was built with the blood of citizens over centuries and yet we stand by and watch as oil execs dictate not only an artificial and unfair price for their products but have the power to sway elections to favor those who cater to industry rather than the people who made it all possible.



mktsrmanipulated's picture

its simple lower dollar higher gas.......thats it enough said

The Chief's picture

Not sure if this is relevant, but gas station operators are getting more desperate to compete and keep the same, higher, margins that they've been enjoying for the last 7 or so years.

I was in upstate PA last week and I stopped to fuel a rental car. It was BELOW empty. I fueled at an EXXON. Independently operated.

As I drove away, my engine started sputtering. My car died 1/3 mile from the gas station.

In front of me 100 yards was another car with their hazard lights flashing. You guessed it. Same fuel, Same station, Same pump (according to our receipts). I was driving a brand new domestic compact car w/ 3000 miles on the ODO.

I called the rental car company, then I walked back to the gas station. The indignant fucking raghead looked at me like I was crazy...the nerve of me to march back in there and accuse him!!! The other driver came in about the time when I was calling the police.

Long story short...the cops did nothing to this Paki scumbag selling watered gas. I called PA Bureau of Standards Weights and Measures (or whatever they were called)....they were powerless. I ended up calling Exxon. They said theyd refund me and they said theyd get back to me. Rental car company (National) told me that they've had over 50 cars die from bad gas....mainly from Exxon fuel.....in that area THIS YEAR ALONE.

I wonder who the big franchiser is in that area. Could it just be a coincidence??

Lumberjack's picture

But, but, but... they need to lower gas prices so they can do this. 




btw, Bruce Krasting was right on about electric cars.


WaEver's picture

Borat is in the house

Cojock's picture

Crude oil was and is being manipulated through Enron-style prepays ie the Saudis lend oil to JPM funds and their muppets, and the muppets lend dollars interest free to the Saudis. These prepays are now largely unwound - that is a principal reason why the Saudis have been shipping more crude to the US, and we see the correlation between financialised equity and oil markets disappear as the oil market becomes de-financialised.

The resulting supported/inflated crude prices squeezed refining margins, because there is a limit to how high gasoline prices can go before demand destruction sets in.

So what happened is that independent and/or inefficient refiners got squeezed out of business leading to a destruction of refining capacity, particularly on the US East Coast and in Europe (where € prices have gone higher than ever they did in 2008).

The situation now is that crude oil is over-supplied and refining capacity is diminished, so crack spreads are way up.

But this does not mean refiners have a free ride to increase crack spreads by maintaining gasoline prices when - not if - crude oil prices collapse, possibly just in time for the election. The reason is of course that gasoline would start to flood in to the US to take advantage of the high prices once the margin covered transport costs.


bank guy in Brussels's picture

The 'black swan', according to Dr Jim Willie, may be the overthrow of the Saudi Arabian oil monarchy, which he thinks may happen within 'months'.

Saudi revolution could mean the end of the petro-dollar, the end of global oil pricing in dollars - and the collapse of the US dollar and the US treasury market, according to Willie.

Willie points out how the Chinese and Russians and BRIC and other emerging nations, have already set up a global alternative to the dollar and Western payment system, after the US so stupidly kicked Iran out of the SWIFT bank transfer scheme. The whole non-Western world saw the danger to themselves - Jim Sinclair has made this point as well - and immediately set up a by-pass to the dollar.

In Saudi Arabia, with 20 million native people (and 5 million foreigners), many of those people are poor, there is an oppressed Shia minority, and a more populist, less sectarian and less oppressive Muslim Brotherhood could replace the perhaps teetering Saudi monarchy, which is recently seeming to hide the possible murder of US-tied leading Saudi Prince 'Bandar Bush'.

The Saudis have been the major Muslim party fuelling 'war on Iran' hysteria along with the US and Israel, the Saudis fuelling Sunni-Shia hostility out of viewing Iran as their great rival in the Middle East.

Jim Willie writes:

« ... Easter Sunday weekend of April 2010, a secret gathering of over 200 Arab billionaires convened in Abu Dhabi. They arrived in unmarked jets. My source was one of only two or three white faces in the crowd, invited by his clients. One result of the meeting was an accord struck between the Persian Gulf oil producers, led by the Saudis, to work toward a pact with Russia and China as protector of the gulf in return for financial cooperation, economic construction, and forward progress. The implicit message was that the Untied States would be phased out in the protectorate. In the balance would lie the Petro-Dollar defacto standard as victim. Events continue to this day in movement toward that end.

However, since the Syrian uprising, a new lethal element has entered the mix. Account will be kept brief, since so volatile and controversial. Just some bare notes. The Assad family in Syria has suffered some assassinations. Apparently, the Saudis had a hand in the killings. HezBollah has vowed retaliation. Their ties to Iran might be longstanding, but perhaps are exaggerated. My view is their home is in Lebanon. In August, Prince Bandar was assassinated. He was the Saudi head of security, and long-time ally to the USGovt. The Saudi regime is concealing his death, with outdated photos and false statements. They are working toward a transition. The House of Saud has been unstable from threats to the south in Yemen. It is unstable from internal threats tied to the fundamentalists. Although cooperation and respect has been shown between Riyadh and Tehran, the Bandar hit has created an entirely new environment. The Saudi regime with high likelihood is in its final months. »


Overfed's picture

It's not that everything is more expensive. It's just that your money ain't worth nuthin'.

eigenvalue's picture

As I have mentioned before, Econmatters is a contrarian indicator. She was a bull on China in 2010. She claimed that QE3 would never happen in August. Now she claims that QE3 will pump up the gasoline price tag. 

Freddie's picture

demand is imploding but so is the dollar. They need moe tax money too.  When things go up and there are LOTs of taxes baked in - govt makes sure it does not go down. 

Boris Alatovkrap's picture

QE3 is drive price of petrol! Bankster is soon find naked of Ponzi Scheme printing and move shadow wealth in hard asset like is Oil. Preparation for blood in street, also purchase precious metal like is Gold, Silver, Bullets.

Boozer's picture

Mr. Boris -

You talk pretty.  Me talk pretty someday.

boiltherich's picture

Boris, not just you but a number of posters have said to the effect that it is the DOLLAR not the gas.  Allow me to be a smart ass for a moment and ask do we now have a different dollar for oil and gasoline?  Because if it is the dollar then why is oil (and other commodities) going down while gasoline spikes like we just attacked Venezuela?  Could it be the horrific hurricane season we have had in the Gulf of Mexico?  Oh, wait, one rainstorm so far this year with the season all but over.  All refining disruption this year other than one overrated storm have been man made and suspicious at that. 

By the way, oil within the last week hit $100.70 and has dropped to as low as $90 yesterday.  Gasoline ROBOB on NYMEX was then $2.80 and hit $3.20 this morning.  That is a 50 cent per gallon rise even as oil dropped by more than 10 bucks and there is NO explanation for it other than arbitrary and politically motivated greed.

Boris Alatovkrap's picture

Crude is down for futures - futures is expire so is cycling. SPR rumor is also frightening of speculation. But is gas always must pump in car (or vodka if good potato crop), so petrol is stable but up for price. But, soon, crude future is go up steady, too. Watch! Banksters soon is scared of holding shadow money in Ponzi Scheme and is cashing out, buying hard asset, like Gold and Oil.

But Boris only is custodial engineer, so what is know!?

cdude's picture

Three letters.... D T O

disabledvet's picture

statistical noise. consumption has dropped to 1996 levels...a staggering collapse of demand and one that will never recover. in it's place comes "alternatives"....which have been anything but for some time now. the Japanese will not be the Luddites the American's want them to be. Once they push forward with their "made in America" stickers everyone else will be playing ketchup. USA Inc will be egging on Japan as these mega caps already have a lot of skin in that game." and as Apple is to Samsung so it will be with Corporate America and "distillates." not that the price of oil appears to be ready to collapse ala 2008...the ability to turn it into useful chemicals has no parallel and is a great "kicker" for the ongoing industrial recovery in the USA. product cycles can be their own reward...as when the Ford F-150 was redesigned in the late 90's. Obviously the modern variant is Hyundai's and Kia's. we'll see if Ford is serious about even being in the game let alone competing. that's a 100 k Warranty. Clearly Government Motors wants us addicted to oil now more than ever. Somebody tried to pull the plug on the Volt. And still no formal regulation of the internet? REALLY? Talk about a dereliction of duty. Anywho I see nothing to stop the onslaught of Super Sized professional military's. Wall Street is offering nothing to the policy makers...and the policy makers own Washington. The Big Entitlement has been passed...onto Foreign Policy in the second term unless Mitt pulls a massive upset. "Oddly Democrat" as it is of course. I'm not sure we've had anything more extreme Right Wing in history.

Boris Alatovkrap's picture

Putin is make jokes for Obama - has toothpick arm in lady's pants. All Russia is laughing sock for Obama on View - "Eye Chocolate". WTF!? Is president or silly girl celebrate? At least Romney is hunting for vermont with rifle. What is Obama? Can run in waves with toothpick legs, too? Is not real US president after Reagan can make soviet scared.

Spastica Rex's picture

Funny +1, but getting kind of grating -1.

Westcoastliberal's picture

There's no way a gallon of gas should cost anywhere close to $4.  We've been screwed for the past 50 years.

edifice's picture

Priced in silver (pre-1965 quarters), gas should cost about $6.15/gal. Why pre-1965 quarters? Because, gas was about 25 cents/gal. for 30 years or so, when we still minted silver coinage.

I know it's unpopular, but I'll keep saying it: gas in this country is cheap, when priced against other assets. Let the vote-downs commence!

NotApplicable's picture

That's hardly an unpopular idea around here. I use it as a teaching tool all of the time to demonstrate the debasement of the dollar.

Popo's picture

Considering oil/gas has to be drilled out from the bottom of the ocean, sent on massive ships to refineries, shipped in special trucks to special stations which store it in massive tanks underground.... it's  a hell of a better deal than "spring water" which is most often just regular water which comes out of a tap in a neighboring state.



Freddie's picture

O dollars aka Bernake bucks are becoming more worthless by the day.  If nothing changes it goes to $6 in 2013-2014. The Chinese and others will pay.  Also a large amount of that cost is .... Taxes.

Tango in the Blight's picture

Before that happens the dollar will have lost world reserve currency status.

Boris Alatovkrap's picture

Boris is give easy analysis... Is Bush end presidency have $11T debt, petrol is $2.50, is Obama for $16T, petrol $4.00, is for Clinton, debt $6T, petrol $2.00. In gallon, Clinton debt is 3T gallon of petrol, Bush debt is 4.4T gallon of petrol, Obama is 4T of petrol. Now is very easy understand, Obama is economic genius, can save United States 400B gallon of petrol. Evil Bush is waste 1.4T gallon of petrol in Iraq and Afghanistan.

Snakeeyes's picture

But QE MBS has no legs. Fannie CC over 10 year crashed to negative levels, but mortgage rates over Fannie CC rose to an all time high!!!!!!!!!!!


Boris Alatovkrap's picture

But is more important price of VODKA! Is fuel of industry - both drive man and traktor!