The retail price of gasoline, which ballooned to more than $4 a gallon in July, brought the entire energy issue to the forefront during the recent presidential campaign. In recent weeks, however, the retail price of gasoline has dropped to under $2 a gallon.

   “It is the biggest rollercoaster I have seen in 34 years in the industry,” said Jeff Morris, president and chief executive of Alon USA, which owns the Alon refinery in Big Spring.

   So what are the driving forces behind the price of gasoline that has caused this fluctuation of more than $2 per gallon in the last six months alone?

   A U.S. Department of Energy report approximates that taxes account for 11 cents, distribution and marketing 6 cents, refining 10 cents, and crude oil 73 cents of every dollar spent on a gallon of gasoline at the pump. Like the retail cost of gasoline, crude oil prices have also varied from a high of $146 a barrel last summer to a recent low of under $60 a barrel. Obviously, crude oil prices are the major factor in the volatile retail gasoline prices, but they aren’t the only factor.

 

   “There are two drivers impacting the cost of gasoline,” explained Morris, “The price of crude is the most obvious as it goes up and down. The price of gasoline generally tracks the price of a barrel of crude. The other underlying factor is demand. I told our investors a year ago that the growth rate (in demand for gasoline) could go negative in 2008 for the first time in a decade. We have had a negative growth rate of 1.9 percent this year. That is something that we have never seen before.”

   Morris claimed all of the partners in the energy industry – OPEC countries, non-OPEC producing countries, drillers, retailers and Wall Street – had put together a business plan to destroy demand because supply couldn’t keep up with demand.

   “It think that was a stupid plan, but finally in 2008 the industry successfully executed the business plan,” he said, “and now we will have to deal with this for a number of years.”

   Morris stated there are three trends which have reduced the demand of gasoline in the United States. One is auto sales.

   “Most customers don’t have many discretionary miles,” he said. “They still have to drive to work and to school. They may cut back on a vacation, but all that means is that instead of driving 15,000 miles a year, they are driving 14,000 miles. But they have made significant discretionary decisions about the type of vehicle they are driving. They may trade in their 15-mile-per-gallon SUV for a 30-mile-per-gallon hybrid. In May, for the first time since 1992, the Ford F150 and the Chevy Silverado were not the No. 1 selling vehicles. Overall auto sales are down 15 percent, and pickups have lost 15 percent of their market share. People are buying different, more fuel-efficient vehicles. The fleet is changing.”

   The second trend impacting demand, according to Morris, is the new legislative requirements that call for a 25 percent improvement in fuel efficiency by 2020. He said the third trend will be a call by President-elect Barack Obama and Congress to address greenhouse gas emissions.

   “You can’t meet standards without addressing the transportation sector,” Morris added. “Twenty-five percent to 30 percent of the greenhouse gas emissions come from the transportation industry. Add all of that together, and I believe gasoline demand growth rates will be negative for a number of years.”

   With all that said, however, Morris contended the oil and gas industry in the Permian Basin will remain vibrant and crucial because of the need to drill more in order to reduce the need to import crude oil from foreign countries

   “At $60-a-barrel crude, most West Texas wells are still justifiable,” he continued. “I can’t predict the price of a barrel of crude oil or the price of a gallon of gasoline, but I am absolutely certain that volatility will increase. This is a cyclical, volatile business. I have a lot of friends in the business in West Texas, and they will be fine. They have been through tough cycles before. They understand it and know to watch the balance sheets and keep their costs down. Newcomers who have borrowed a lot of money will get their hat handed to them. But the old hands will do fine at $60 a barrel.”

   Morris noted that the refinery in Big Spring has been in operation for 75 years, surviving many similar cycles as well as a devastating fire in February. He said the fire didn’t really impact the retail cost of gasoline in the Permian Basin.

   “We chose not to cancel any contracts,” he said. “We understand relationships are important. We bought gas and diesel from other sources and paid pipeline tariffs even when the refinery was down. We sustained contracts with our crude oil suppliers. It affected us financially, but that is part of the deal.”

   Jim Norman put blame on several other factors for the volatility in crude oil prices in the past six months. Norman, a contributing writer for Platts Oilgram News and author of the book “The Oil Card: Global Economic Warfare in the 21^st Century,” claimed there had been a massive influx of money from pension funds, trust funds, hedge funds, etc., flow into the New York Mercantile Exchange (NYMEX) futures market that never belonged there.

   “The flood of money drove prices way up,” Norman said.

   For example, Norman pointed out that earlier this year gasoline demand was down 2 percent to 4 percent below a year ago, but crude oil prices still ran from $90 to $146 a barrel.

   He blamed inept regulations by the Commodities Futures Trading Commission, which Norman said “failed to abide by its long-standing regulatory stance which limits speculative money in the futures market in order to preserve the NYMEX as a price discovery vehicle. The money from these pension funds and other managed funds in the commodities really happened in the last two years. It peaked in July before the global liquidity crisis hit. Then everyone ran for the exit, which caused the complete collapse.”

   Morris refused to speculate on pension fund money invested in the commodities market being a major contributor to the run-up and subsequent drop in crude oil prices during 2008.

   “There is some merit to that,” he acknowledged. “I don’t want to speculate on that, but let me give you a fact. It is a fact that on June 30, one billion barrels of crude oil were traded that day on the NYMEX. We use less than 20 million barrels a day in the United States, so that means that every barrel of crude oil used in the United States was traded 50 times in one day. That doesn’t make sense. You can draw your own conclusion, but I don’t think oil producers and refiners bought all one billion barrels.”

  The recent demise of investment firms like Lehman Brothers, which held 90 percent of the hedge funds futures contracts, will also have an impact on the price of gasoline over the next several months, according to Morris.

   Norman predicted that we will see the world glutted with commodities for the next six months to a year.

   “We will have much more production capacity than buyers,” he said. “I think there will be a rational bottom floor of $40 a barrel. The price of gasoline is set on the NYMEX, not at the wellhead. All contracts traded are subject to the same whipsaw effect from the huge in-rush of managed money and the out-draft of that same money. That sloshing around, along with a sharp drop-off in driving by Americans, has offset all the normal fundamental drivers of the market. After what has happened on Wall Street, there is a not a lot of money to go back into the market.”

   Supply and demand are still major factors in dictating the price of crude oil and retail gasoline, and Morris claimed the recent drop is attributable to the lower demand.

   “I think we are seeing the effects of demand decrease,” he said. “We are in for a pretty tough go for a few years. I tell our investors and bankers that I am 90 percent confident of what our margins will be next year, plus or minus 100 percent. That is the business environment we are in today.”