Cheaper Gas on the way, but it has little to do with low oil prices

Posted on: Tuesday, August 25th, 2015

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Tuesday, August 18, 2015

Michael Ervin, President of Consulting at Kent Group Ltd. joins BNN to discuss the current situation with gas prices.

 

Highlights from the Interview:

Relief at the pump is on the way, according to one petroleum industry consultant. But it’s not because of a drop in crude oil that has seen prices fall to their lowest level in six years. It’s the arrival of the fall foliage that drivers can thank for a cheaper tank.

Michael Ervin, the president at Kent Group Ltd., says demand for gasoline will drop 25 percent as the summer vacation season draws to a close, providing some much-needed breathing room for refineries as they build up their inventories after months of peak demand.

“Inevitably we see a decline in the crack spread and a corresponding decline in the pump prices,” said Ervin in an interview with BNN.

“Crack spread” is an oil industry term that highlights the difference between the price of crude oil and consumer-grade petroleum products like gasoline. It’s basically the profit margin for “cracking” or refining crude oil from long-chain hydrocarbons into useful shorter-chain petroleum products for consumers.

“Why the prices [of gasoline] move or don’t move in correspondence with the crude oil price really comes down to refiner margins. They’re not static. Gasoline is a commodity just like crude oil. When supply of gasoline is tight, as it is now, with relatively high demand, we’re seeing refiner margins at very high levels,” said Ervin.

The global oil market is generating a three million barrel per day surplus, largely driven by oversupply from OPEC. But that’s not translating into an excess of gasoline in North America.

“Where we see a supply glut in crude oil, we actually see the very opposite with gasoline. The supply of gasoline is very restricted by the refining capacity that exists in North America relative to demand,” said Ervin.

A breakdown at a BP refinery outside Chicago is pushing up the wholesale price of gasoline. While mechanical breakdowns are not unusual, the failure of the largest of three units at the Whiting Refinery – one of the primary processors of Canadian heavy crude in the U.S – comes at a particularly inopportune time for Canada as demand remains high through the Labour Day holiday weekend. The situation in Whiting puts additional pressure on other facilities, which leads to higher costs at the pump.

“Right across this continent, refineries are going flat out keeping up with demand. That of course is the formulae right there for the high crack spreads or high refiner margins that we see right now,” he said.

Ervin says Canadians expecting a one-for-one price move between crude oil and gasoline prices forget the other components that collectively outweigh the price of the commodity. Crude costs accounts for just $0.40 per liter at the pump.

“If the price of crude oil falls 50 percent, as it has, we don’t necessarily see a 50 percent fall in the price of gasoline because taxes don’t go down. We don’t see refiner margins change necessarily, and we certainly don’t see the mark-up at the retail pump change,” said Ervin.