Why Natural Gas Affects Prices At The Pump
The other day a White House spokesman offered familiar criticism of oil companies for not reducing gasoline prices to match the recent drop in crude. It’s easy to manipulate charts to make a point, and the example used in the press briefing does that.
Gasoline prices have fallen recently, but is their relationship with crude oil changing?
It turns out that a scatterplot of crude vs gasoline over the past five years can be interpreted to support the White House claim that prices at the pump haven’t dropped as much as they should. Today’s gasoline prices are notably off the linear regression line over the past five years. It’s absurd to blame this on oil companies – it is a competitive market and there have been no serious charges of collusion. So what has changed?
One area is net trade. The US is divided into Petroleum Administration for Defense Districts (PADDs) which date back to WWII. Data on oil and refined products is mapped into these regions by the Energy Information Administration (EIA). The US generally imports gasoline into PADD One (east coast) because that’s where the ports are. It is used within the region and elsewhere across the country. We export from PADD Three (the Gulf coast) because that’s where many of our refineries are located.
We produce over 9 million barrels a day of gasoline. US refineries usually operate at >90% of capacity, and that is the case today. They’re pumping out as much as they can.
Trade flows tend to be seasonal – in the past five years we’ve been a net importer and exporter of refined products. We tend to be a net importer during the summer when domestic demand is highest. However, this summer we’re a small net exporter. Less gasoline is coming into the US than normal.
To understand why this is the case it helps to look at refinery inputs. Converting crude oil into gasoline is an energy-intensive process. Heating and vaporizing are critical steps in refining. Although some refineries produce fuel gas as an output, which then powers their processes, they also use a lot of electricity which is often generated by burning natural gas.
The global market for natural gas allows for much bigger regional variations than does crude oil, which is relatively easy to transport. Natural gas moves through pipelines or, when compressed into Liquefied Natural Gas (LNG), by specialized ship. The facilities required both to ship LNG and receive it along with their cost mean transportation expenses figure much more prominently than for crude. Russia’s invasion of Ukraine has caused big spikes in LNG prices in Europe and Asia. In energy equivalent terms, US natural gas costs around a quarter as much as a barrel of crude whereas Europe and Asian prices are around two times as much – 8X the US equivalent price.
Natural gas as an input to US refining costs up to around $2.50 per barrel of crude, so it’s not a significant cost. The global pricing described above shows that in Europe it’s substantially more – perhaps 8X as much. Refineries in Europe and elsewhere that might normally export gasoline to the US east coast are finding they’re no longer competitive – hence the typical surge in net imports that comes with the summer driving season is absent.
For more detail on why prices at the pump high remain high, check out RBN Energy’s recent blog post Bring Me Some Natural Gas – A Key Driver Behind Today’s High Refining Margins.
The president is blaming greedy oil companies, a simplistic message not supported by any evidence. He’s trying to deflect blame for gasoline prices heading into the midterms. Perhaps the solution is really too complicated – this blog post won’t easily fit into a soundbite.
But it does show how interconnected different elements of the energy complex are. In the US we’re fortunate to have relatively cheap natural gas, despite the Administration’s vilification of anything fossil fuel related. Russia’s invasion is partly to blame, although the European natural gas prices are the cause along with higher crude.
EQT Corporation, a natural gas producer, released a survey showing that nearly 70% of voters support increasing natural gas production. The support was bipartisan. EQT is hardly an unbiased observer, but politicians are learning that we want our energy to be reliable, not intermittent, and not unreasonably expensive. The White House promises “good-paying jobs and energy security.” So far there’s not an example to emulate. The truth is that transitioning to a low carbon economy will be hugely expensive and disruptive. Because it’s not sold honestly, support is thin. Inflation in food and energy is the more immediate problem facing most people, and today’s climate policies are partly to blame. Natural gas is vital to today’s energy supply and will be crucial to any thoughtful path forward.
We have three funds that seek to profit from this environment:
Please see important Legal Disclosures.
The information provided is for informational purposes only and investors should determine for themselves whether a particular service, security or product is suitable for their investment needs. The information contained herein is not complete, may not be current, is subject to change, and is subject to, and qualified in its entirety by, the more complete disclosures, risk factors and other terms that are contained in the disclosure, prospectus, and offering. Certain information herein has been obtained from third party sources and, although believed to be reliable, has not been independently verified and its accuracy or completeness cannot be guaranteed. No representation is made with respect to the accuracy, completeness or timeliness of this information. Nothing provided on this site constitutes tax advice. Individuals should seek the advice of their own tax advisor for specific information regarding tax consequences of investments. Investments in securities entail risk and are not suitable for all investors. This site is not a recommendation nor an offer to sell (or solicitation of an offer to buy) securities in the United States or in any other jurisdiction.
References to indexes and benchmarks are hypothetical illustrations of aggregate returns and do not reflect the performance of any actual investment. Investors cannot invest in an index and do not reflect the deduction of the advisor’s fees or other trading expenses. There can be no assurance that current investments will be profitable. Actual realized returns will depend on, among other factors, the value of assets and market conditions at the time of disposition, any related transaction costs, and the timing of the purchase. Indexes and benchmarks may not directly correlate or only partially relate to portfolios managed by SL Advisors as they have different underlying investments and may use different strategies or have different objectives than portfolios managed by SL Advisors (e.g. The Alerian index is a group MLP securities in the oil and gas industries. Portfolios may not include the same investments that are included in the Alerian Index. The S & P Index does not directly relate to investment strategies managed by SL Advisers.)
This site may contain forward-looking statements relating to the objectives, opportunities, and the future performance of the U.S. market generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involves a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. Prospective investors are cautioned not to place undue reliance on any forward-looking statements or examples. None of SL Advisors LLC or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein speak only as of the date that they were made. r
Certain hyperlinks or referenced websites on the Site, if any, are for your convenience and forward you to third parties’ websites, which generally are recognized by their top level domain name. Any descriptions of, references to, or links to other products, publications or services does not constitute an endorsement, authorization, sponsorship by or affiliation with SL Advisors LLC with respect to any linked site or its sponsor, unless expressly stated by SL Advisors LLC. Any such information, products or sites have not necessarily been reviewed by SL Advisors LLC and are provided or maintained by third parties over whom SL Advisors LLC exercise no control. SL Advisors LLC expressly disclaim any responsibility for the content, the accuracy of the information, and/or quality of products or services provided by or advertised on these third-party sites.
All investment strategies have the potential for profit or loss. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will be suitable or profitable for a client’s investment portfolio.
Past performance of the American Energy Independence Index is not indicative of future returns.
A soundbite-length rebuttal to White House’s accusations could read: “Crude oil prices may have fallen a bit, but the cost of refining has gone through the roof.”
I really appreciate this blog every week…its the best I’ve seen in the MLP pipeline space. Thank you very much!