If it’s fixable then the energy sector can usually fix it.
This is particularly true when we look at the oft maligned refining industry; the ones who, like it or not, provide an essential cornerstone not only to this country’s economy, but globally as well.
For several reasons last week, there were a total of 13 refineries out of action in the U.S. Six in California, three in Washington, three on the Gulf and one in Ohio. As mentioned in last week’s report, this caused pump prices in Lower Mainland B.C. to hit $2.42/L while Prairie prices also spiked even with crude prices falling. The outages forced up rack or wholesale prices and sent refining margins into the stratosphere.
In January of this year, the Vancouver refining margin (the difference between the cost of crude and the wholesale price) was 49 cents per litre (cpl). This jumped to a record 75 cpl in September, which is why pump prices hit the $2.42/L level.
That’s when the oil industry fixed the fixable and brought the facilities back online.
The result was almost instantaneous. Gasoline rack prices began to fall on Monday of this week by 14 cpl and then on Wednesday they fell another 20 cpl.
On the Prairies, rack prices have also tanked by 18 cpl. This was not due to the actions of any political white knights, or the hysterics of a whining eco zealot fraternity.
Something was broken and the oil industry fixed it. That was good news for the consumer, but no one thanked them for it.
So, the Western part of the country seems to be getting back to normal.
In the East things can’t as easily be repaired when we’re looking at the calendar as well as U.S. distillate inventories. These aren’t mechanical problems that can be solved. You can’t tell Mother Nature to take some time off and cancel winter this year. You can try to tell the Russian President to play nice and crank up supply of diesel and natural gas to Europe, so they don’t freeze as winter approaches. But good luck with that.
The distillate shortage is not just another irritant for North America or Europe, it is universal.
Global refining capacity fell by 3.8 million bpd during the pandemic period 2020 to 2021. This supply volume will not come back because no new fossil fuel refineries are on the books. These days oil refineries are social, “no-no’s” to the “colour me green” investment community.
So now, we are paying the price. We’re already paying through higher interest rates, which are supposedly stemming the inflation bleed.
The distillate family of transportation fuels are the ones that literally deliver the goods we need right across this country.
The normal spread between diesel and gasoline wholesale prices at this time of year is about 5 cpl, with diesel on the high side. Well, that high side has just gone out of control – the spread is now between 56 and 60 cpl.
Post It Note to the Prime Minister: You cannot slow down inflation when diesel prices are speeding out of control.
But then again, he can’t fix the unfixable either. It’s too late now anyway, even if he wanted to.
– Roger McKnight – B.Sc., Senior Petroleum Analyst