Fuel price volatility

Worrying and calming messages mixed

A combination of refinery shutdowns following the hurricanes, decrease in demand for gasoline as people drive less under high prices, and concern about heating oil supply as the weather gets colder have left fuel prices pegged high but unsure about which way to move.

Sep.30.2005, The Daily Times, Maryville, TN: Fuel costs soar

Despite a Department of Energy report Wednesday that the nation's stock of gasoline is growing, many East Tennessee drivers experienced sticker shock at the pumps Thursday afternoon.

Prices at some stations rose as much as 30 cents, hitting a high of $3.29.

Sep.30.2005, Bloomberg: Gasoline Futures Drop for Second Day on Signs of Lower Demand

Record pump prices and concern about fuel shortages caused by Hurricanes Katrina and Rita are showing signs of denting consumer demand, prompting a second-straight decline for gasoline futures... About 5 percent of the nation's refining capacity has been closed because of Hurricane Katrina.

``We're still facing some monumental problems getting these refineries back up,'' said Andy Lebow, a trader with Man Financial in New York...

The shutdown of refineries and efforts to maximize gasoline output may lead to higher heating oil prices when the weather cools. Most refiners try to shift production to emphasize heating oil over gasoline in September. High profit margins may have led facilities to put off changing their mix of products.

``With the weather still relatively warm, the market is unlikely to sharply focus on the bullish heating oil market that is in the works,'' said Antonio Szabo, chief executive of Houston-based consultant Stone Bond Technologies. ``Refiners are making gasoline late in the year.''

Volatility of fuel price is enhanced by monopoly practice (desire for maximum profit), delivery system operations near maximum capacity, and the fact that geological supply also is being drawn at near-maximum rate. Without effective swing production, the only way prices are going to be limited is through demand control and reduction. Demand reduction for gasoline finally is showing up at the $3/US gallon threshold. Heating oil and natural gas will be a tougher nuts if we have a cold winter in the Northern US, partly because of the monopoly practices described in the Bloomberg story above. Deja vu 1973. Worry.