June Gasoline Cost is $1.30 Per Gallon Over the Cost of Crude
The June Short Term Energy Outlook and the June 10 Weekly Petroleum Status Reports by the EIA are now out. They show increasing margins of the price of gasoline over the price of crude. This is called the “crack spread” since the refineries are cracking the crude oil by molecular weight to make different kinds of fuel, heating oil, and other petroleum products.
We start with the New York Harbor (NYH) Conventional Regular Gasoline in the Red line, above the West Texas Intermediate (WTI) Crude Oil cost with Dollars per Gallon on the left axis. On the right is the Dollars per Barrel where there are 42 gallons per barrel.
On June 10 2020, gasoline was $4.20 per gallon, while crude was $2.90 per gallon, with a cracking spread of $1.30 per gallon. By comparison, six months earlier in December 2021, the crack spread was $2.20 – $1.60 = $0.60 per gallon. A year earlier, in July 2021, the crack spread was $2.20 – $1.80 = $0.40 per gallon. We also see absurdly higher profits in heating oil.
Not coincidentally, today President Biden excoriated oil companies for excess profits, and for using the profits to buy back stock, rather than lowering the price to consumers to return to normal profits. The profits of the five largest oil companies was $35 billion for the first quarter of 2022. This is an increase in profits of over 300% from the first quarter a year ago. The oil companies are Shell, Chevron, ExxonMobil, ConocoPhillips, and BP.
In parts of the US, including California, the Northeast Coast, Houston, and the Chicago area, ethanol from biofuels is blended with a Reformulated Blendstock called RBOB of gasoline to make a motor fuel of fewer CO2 emissions. This covers 30% of gasoline used in the US. Here is the crack spread shown in the Dollars per Gallon on the right vertical axis. The left vertical axis is for the RBOB futures price in dollars per gallon, which is how the refiners hedge their price.
Brent Crude is sweet (low sulfur content) light (low density) crude oil which is also environmentally favored. The crack spread was up to $1.39 per gallon on June 2nd, as opposed to a range of $0.30 to $0.60 cents a gallon in the past year.
Without the excess profits, the price of gasoline for most of America could be around 80 cents a gallon cheaper than the $5 per gallon now. The price of gasoline in California or the Northeast Coast could be around 95 cents per gallon cheaper.
We next show that the US crack spreads are greater in the US than in Northwest Europe. The oil companies hedge themselves by purchasing futures in a mix of 3 barrels of oil futures to 2 barrels of gasoline futures and 1 barrel of heating oil. That covers the 3 barrels of crude with 3 barrels of products, and eliminates the risks of variable price changes.
Note that the left axis is in dollars per barrel. This must be divided by 42 to get dollars per gallon. So we see that in June the crack spreads shot up from around a dollar per gallon. Roughly, the Northwest Europe (NWE) crack spread is about 2/3 of the US crack spreads.
Now that the pandemic is passing, it is nice that OPEC has reduced its spare capacity from 5 million barrels per day to 3 million bpd. However, the remaining 3 million bpd could do a lot to lower prices in a world market of 100 million bpd. It would also help reduce Russian receipts for its oil supply. Three million bpd at $120 a barrel is $360 million per day, or a billion dollars every 3 days to Russia.
