The Wall Street Journal reports this morning that “gasoline prices fall as imports rise, demand drops”. Naturally, I cackled gleefully and clapped my hands when reading this. The EIA weekly petroleum status report indicates that
Total product supplied over the last four-week period has averaged over 20.0 million barrels per day, or 3.2 percent less than averaged over the same period last year. Over the last four weeks, motor gasoline demand has averaged nearly 8.9 million barrels per day, or 2.2 percent below the same period last year.
Two important things there: first, total product supplied is down 3.2 percent, even though 20 percent of refining capacity is still offline. Among other things, this indicates both that imports are higher, and that refiners are squeezing more gasoline out of every barrel of crude (the WSJ article notes both points). Second, high prices have led to a decrease in demand; demand is not very elastic, but at the margin price increases have reduced quantity demanded. The combination of these offsetting factors has led to prices falling, although they remain above pre-Katrina prices.
Here’s the information about imports:
U.S. crude oil imports averaged 9.2 million barrels per day last week, up 588,000 barrels per day from the previous week. Over the last four weeks, crude oil imports have averaged 8.9 million barrels per day, a decline of 1.1 million barrels per day from the comparable four weeks last year. Total motor gasoline imports (including both finished gasoline and gasoline blending components) last week averaged over 1.5 million barrels per day, setting a weekly record for the third week in a row, while distillate fuel imports averaged 311,000 barrels per day.
In normal refining conditions we don’t import that much gasoline from Europe, but now, with refinery capacity still not fully online and continuing high prices (although they have declined), imports are attracted to the US market.
This example provides an elegant illustration of the dynamics of market processes. Exogenous shock. Production capacity falls, prices rise due to supply curve shifting in. Quantity demanded falls, and perhaps even demand falls, shifting demand curve in, leading to further price reductions. Simultaneously, other suppliers bring product to market, lured by the higher-than-usual prices, shifting supply curve out. Incrementally, quantity and price change until they reflect the prevailing costs and preferences.
[NOTE: the KP Dad is visiting, and I’m on his laptop, and because he’s a security weenie his cookie setting doesn’t work and play well with the WSJ website for a link to the story. It’s on A2 of the print edition.]