The Oil Refiners’ New Ouija Board

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Oil refiners have decided to produce more diesel and less gas. They believe that diesel is more profitable, which is true, and that demand for it will rise in developing countries, which may not be true.

Refiners have been losing money as the price of oil rises. They cannot always pass the increase on to customers. And, diesel prices are up 56% over the last year while gas in up only 20%. That makes gas production a bad deal. According to The Wall Street Journal "Diesel’s higher price means the fuel is more lucrative for refiners at a time when gasoline profits are shrinking."

Part of the thinking by refiners is that gas consumption will drop as the economy falls off. This means that they cannot push up gas prices and make more money.

Refiners now view themselves as soothsayers in hardhats. Because gas prices are still rising sharply, it is not a foregone conclusion the it will be the low margin fuel. If large refineries move production toward diesel, they cannot turn on a dime and move back to gas.

Large developed countries like China and India are underwriting the price of diesel so that it is cheap for their citizens. That keeps demand up. But, if there are economic problems in those countries and the subsidies go away, demand for diesel will dry up.

Focusing less on the gasoline market is a dangerous game as long as the price the consumer will pay keeps going up.

Douglas A. McIntyre