by Calculated Risk on 5/13/2008 11:36:00 PM

Occasionally I've read claims that the lack of refinery capacity was driving up the price of oil. As an example, here is an excerpt from an old Bloomberg article:

The shortage of refining capacity worldwide has contributed to the 57 percent rise in oil prices in the past year.

Of course the opposite would be true - a lack of refining capacity would keep down the price of oil (because refineries are the demand side of the equation for crude oil), but increase the price of gasoline (refineries are the supply side of the equation for gasoline).

Click on graph for larger image.

But now the demand for gasoline in the U.S. is falling, while world demand for oil is still strong. So the price of oil has risen sharply (because of global supply and demand, probably not speculation), while the price of gasoline in the U.S. hasn't kept pace as shown on the graph. (tell that to U.S. consumers!)

The graph compares the price of oil and gasoline in the U.S. Source: EIA for oil and gasoline. Note that oil prices (blue) have risen much faster recently than gasoline prices (red).

Jad Mouawad at the NY Times gets it right: Oil Refiners See Profits Sink as Consumption Falls

American refiners are going through a traumatic period. In a time of record gasoline prices, some of them actually lost money in the first quarter, and for virtually all refiners, profits are down sharply.

Experts say the refiners are caught in a double bind. The price of their raw material, oil, is rising because of strong global demand. At the same time, consumption of gasoline in the United States is falling as a result of slower economic growth and consumer efforts to conserve.

Note: if you are wondering what could lead to a decline in oil prices, then global oil demand would have to slow or decline. One possibility is that growth in China could slow later this year as the world economy recouples:

In China ... oil imports have surged in recent weeks, a signal that the government is stockpiling oil and diesel in anticipation of the Olympic Games. Beijing, the International Energy Agency report said, is seeking to avoid a repeat of the embarrassing fuel shortages and power disruptions that plagued the country last year.