How to Put an End to Gas Price Spikes

The United States is producing almost 7 million barrels of oil a day, more than it has in a decade and a half.  We also now export refined gasoline, something we’ve never done before in our history.  Finally, our autos are getting more efficient almost every year.

So, supply is up in both crude and finished products and demand is down, reflected by our ability to export and a drop in our total miles driven. The laws of economics would say that prices should be low.  So why are we seeing high gas prices at the pumps right now?

Indeed, this is a yearly phenomenon:  Gas prices tend to spike and wane, but those fluctuations are almost never related to the simple supply and demand fundamentals here in the US, they are instead moved by global and financial inputs:

The volatility for gas prices based upon global inputs is in direct contrast to the volatility of natural gas and power markets that are driven by very localized inputs.

In natural gas, you have deep supply created by new hydraulic fracturing technologies in shale which has removed much of the short-term weather related volatility that was the norm for natural gas during the first decade of this century:

For natural gas, local fundamentals work to establish price – more supply equals a lower price. This is importantly related to the transport costs for natural gas: If natural gas were as easily exported as refined gasoline – you’d again be stuck with a globalized market price. 

Power is of course even less transportable – and therefore is a localized market ‘in extremis’ – even small changes in weather and outages from producers can spike short term power prices as much as 300-500% and more. 

But as a utility customer, you don’t see much of this volatility because prices that are charged for electricity by utilities are controlled at the Federal level by the FERC and locally by state utility commissions. Utilities earn a fair return on their costs, while consumers benefit with steady prices.

Could we do the same thing with gasoline, allowing local fundamentals to bring gas prices down while allowing consumers a more reliable price with fewer fluctuations?

I think it’s possible to begin to ‘localize’ refined product markets in the same way we have localized power prices, by making refineries work under more of a utility-type structure.  Such an action would also require regulation regarding export of finished products much like the regulation we already have governing the export of domestic crude oil and natural gas. 

The upside of this idea is tremendous to both consumers and refineries.  Of course, changes at the pump of 20 or 30% a month would be a thing of the past and a generally lower price would almost certainly follow.

And for the refineries, they’d get a reasonable margin for their costs that eluded them for almost 3 years from 2008-2010 and threatens to disintegrate again this year. 

The success of the utility structure for electricity recommends this idea for gasoline, which is almost universally relied upon and a foundation of our recovering economy. 

P.S. For those who wanted a stock idea for this column, here’s a quick one – continue to be on the lookout (as I’ve often warned you) for refinery MLP IPO’s.  The latest from Phillips 66 (PSXP) exploded 20% on its first day.  They will all continue to work and should all be bought practically sight-unseen.