The price of oil vs. price of gasoline inversion explained

Articles — By forcechange on November 24, 2008 2:52 pm

We noted last week that an interesting situation has developed where the price of raw oil is actually more expensive than refined gasoline.  The Economix blog at NYT explains some of the possible causes for this unique situation, including: 

Diesel is used by much of the world for electricity and industry, and similar to gasoline, is derived from oil.  However, demand for diesel has not fallen as precipitously as gasoline, which may be propping up the price of crude oil.  Where gas prices have fallen 70% from their peak, diesel has fallen only 58%.  (Oil has fallen 66%.)

Additionally, due to the nature of the product, crude oil is much easier to store than gasoline, which has a tendency to vaporize.  If there is concern that future global events may cause a disruption of oil supplies, it would make sense to store crude oil, rather than gasoline, which would prop up demand.

Finally, since oil futures are much higher than the current price of spot oil, refiners may have an incentive to stock up on even more oil right now, which would also act to prop up demand.

However, regardless of what is contributing to this odd price situation, the longer it lasts, the less gasoline refiners will produce, and the more likely an increase in prices in the future will occur. 

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