Back to the Future for U.S. Oil Refiners

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"The theory of the Invisible Hand of competition* is back to the future on matching product supply with demand."

A combined sigh of relief was breathed by the petroleum community this week after the United Steelworkers Union announced that it had reached a tentative agreement with a unit of Royal Dutch Shell (RDS.A). This averts a possible strike at facilities that handle the bulk of the U.S.'s crude oil refining capacity.

Crude oil prices should not go below $40 a barrel for the time being without the threat of an oil workers strike looming over the horizon. Normal flow of crude oil from the oil wells into the refineries will restore stability for the price of crude oil for the time being. Refiners will, however, be looking to make up for lost ground and profits from their disastrous 4th quarter 2008.

This year the price of crude oil will be driven up or down by the price of gasoline at the pump. Actually gas prices have been heading up already while the crude oil prices have been meandering around the $40 a barrel mark. The good news is that the petroleum trading market is back to normal.

The theory of the Invisible Hand of competition* is back to the future on matching product supply with demand. The petroleum industry should be able to refine crude oil and produce gasoline and diesel at an affordable level for both the consumers and themselves.

On the refining side, U.S. refineries are mandated to switch over to the lower Reid Vapor Pressure (RVP) summer gasoline, which is as early as February 15th for West Coast oil refiners. That usually means that refineries shut down for their spring turn-a-rounds this time each year after they have conducted a "fire sale" on existing higher RVP gasoline.

Not this year, however, as refineries have already dumped most of their excess gasoline inventories in November and December. They did that to avoid paying ad valorem inventory taxes to start out the year with lower than normal levels of inventory. This caused even further depression in gasoline prices around the Thanksgiving and Christmas day holidays along with motorists driving less miles with the ever lower gas prices.

*Wikipedia - Adam Smith's theory of the Invisible Hand states that if each consumer is allowed to choose freely what to buy and each producer is allowed to choose freely what to sell and how to produce it, the market will settle on a product distribution and prices that are beneficial to all the individual members of a community, and hence to the community as a whole. The reason for this is that greed will drive actors to beneficial behavior. Efficient methods of production will be adopted in order to maximize profits. Low prices will be charged in order to undercut competitors. Investors will invest in those industries that are most urgently needed to maximize returns, and withdraw capital from those that are less efficient in creating value. Students will be guided to prepare for the most needed (and therefore most remunerative) careers. And all these effects will take place dynamically and automatically.

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