Crude: Barrels of fun to crack you up

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However, crude prices and the prices of its products do not move in absolute lockstep. A 5% rise in crude over some period of time may produce a 3%, a 4% or a 6%, 7% or 8% rise in the products. If the products' prices are moving higher at a greater percentage rate than the crude, it means that it is becoming comparatively more profitable to be a refiner than a producer of oil, since what you are receiving as a price for your finished product, the petroleum finished products, is rising faster than what you are paying for the raw material you need to make that product, crude oil.

A complex mathematical formula called the "crack spread" ("crack" being the industry jargon verb defining the process in which crude oil is refined into products) illustrates this ever-dynamic price relationship between crude and its products. As it rises, crude's products are becoming comparatively dearer than crude itself. No matter what the media are reporting about the world's various far-flung crises, if the crack spread is rising, the products, especially gasoline, are leading crude oil up, not the other way around.

So what's the crack spread doing during the current Iran/UK crisis? Just like It Happens Every Spring, it's rising, but this year it's rising earlier, faster and higher than previously. From being under 10 for most of the previous six months, it has surged to almost 25 recently. It pulled back a bit early last week, but by Friday, March 30, it was on the move again, closing at 18.37, up 12% on the day.

Every time the price of crude rises and the Western popular media accuse OPEC nations of price gouging, their defense is that it's not them, it's the Western oil companies. The rising crack spread essentially proves their point. There's no real shortage of crude oil; actually, the world is awash in it. Spare refining capacity, that's another story.

Fox News is dealing with consumer concern over rising US energy prices by working overtime to make sure that their newsreaders speak the name "Al Gore", the Oscar winner for An Inconvenient Truth and former US vice-president and Democratic party candidate for president in 2000, as the audio accompanying video of US gas stations displaying $3 a gallon or more prices for gasoline on their signboards. Much like the conditioned-reflex therapy attempted on Alex in A Clockwork Orange, in which he was administered a nausea-inducing and respiration-suppressing drug while watching violent films, thus making him associate the two, the intention here is apparently to make viewers think of, and associate Gore with, the current financial unpleasantness of filling their cars with fuel.

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If environmental Luddites are preventing creation of new US refinery capacity, surely that can't be true in the 95 other countries where refineries are currently sited, not to mention the 100 or so other countries where they are not. Many of these countries are in the Third World; they are desperately poor, and local environmental movements, if they exist at all, are at most nascent. Surely, if the oil companies knocked on their door asking to build a new refinery or expand a currently sited one, they would not say no.

But, like Sherlock Holmes' dog that didn't bark, the story here is the knocks on the doors that don't come, the world refinery capacity that isn't being built.

According to the Energy Information Administration of the US Department of Energy, total world refinery capacity has only increased 1.5% from 2000 to 2005, from 81.53 to 82.8 million barrels a day (mb/d).

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