Wednesday, January 24, 2007

Why gas prices are going down, why gas prices will go back up. UPDATED

What used to be called the Navel Oil Reserves are now called the Strategic Petroleum Reserves. It's a bunch of crude oil stored in salt caverns, mostly in Texas and Louisiana. The government has started to buy 100K barrels of crude a day to bring the stockpile up to current capacity of 727 million barrels. Last night, the present announced plans to raise capacity to 1.5 million barrels.

Rather than being used for strategic purposes, the oil is mostly lent to oil companies for some specific reason (e.g., pipeline break someplace). The oil companies are allowed to replace the oil they "borrow" with oil, even if the price of oil has declined.

This seems to be how it works: we import oil, we produce oil, when imports exceed what we need, the government buys some of what we produce for the reserves.

US Energy Secretary Samuel Bodman announced today that the Government would soon start buying 100,000 barrels of oil a day to fill the stockpile to its present capacity of 727 million barrels. This caused crude oil prices to have their biggest gain since the aftermath of hurricane Katrina in September 2005. Futures prices in benchmark West Texas crude oil rose $US2.46, or 4.7 per cent, to $US55.04 a barrel on the New York Mercantile Exchange.

In more simpler time, before the strategic reserves, oil prices were controlled by the Texas Railroad Commission which set an allowable, the percentage of its capacity that an oil well in Texas was allowed to produce each month.

Oddly, we have essentially no strategic reserves of gasoline, heating oil, or jet fuel. We also have no emergency or excess refining capacity and no new refineries have been constructed in the US for thirty years.

UPDATE -- In the time it took me to write this, gas went up $.20 locally.

1 comment:

The Phoenix said...

I noticed gas went up suddenly. Maybe one of the big oil CEOs needed to buy a new golf course.