Japan Earthquake Could Test U.S. with $5 Gasoline Prices

The fallout on the fuel market will be severe following the 9.0 Japanese earthquake on Friday, March 11. 2011, since Japan will have to supplement their nuclear energy power production with coal, natural gas and oil-fired power plants.

Information is short and hard to obtain about the status of the nuclear power plants in Japan. Not being a nuclear physicist it is hard to sort the facts from the hysteria but going on past history we are being fed pap by official press officials of the Japanese government about the real situation in dealing with this cataclysmic event. These same officials withheld vital information after the 1995 Kobe earthquake, which killed more than 6,000 people.

We are now hearing and seeing different versions between watching the live feeds on T.V. and Twitter as events enfold and the reports from official press reports. Under the circumstances that may be understandable as the government does not want to cause a panic. But do we believe them or our lying eyes?

Japan is the third largest country in the world in terms of nuclear energy production, following France, and the U.S. which is in first place (see table above). The country gets about 30% of its power from nuclear sources. Reportedly, 11 nuclear reactors and 21 thermal power plants where shut down after the earthquake, and BBC News put the reduction in output at Japan's nuclear power generators at anything from 25% to 50%.

On top of the loss in the power generation capacity, the Wall Street Journal reported that about 1.2 million barrels per day refining capacity in Japan is also shut down after the earthquake disaster. With this much capacity off line, Japan needs to secure alternative means of generating power and petroleum products as well.

Meanwhile, diesel fuel and coal are readily available. Cargoes of diesel fuel can be shipped almost immediately from the U.S. West Coast refineries to meet up with this new found Japanese demand.

The following graph shows the world refining capacity and how much North America and Far East Asia use crude oil for fuel production:

More refineries will have to be brought into production with economics justifying their running at full capacity. It may not cause crude oil to spike up, but it will most likely test whether consumers are going to be willing to pay $5 per gallon for gasoline and diesel fuel in the U.S.

San Antonio-based refiner Valero Energy Corp. (VLO) closed their 235,000 barrels per day located on the island of Aruba in the Caribbean in July 2009, after the plant had been losing tens of millions of dollars a month.

Valero re-started their refinery near the end of 2010 because of improving economic conditions. Valero has since completed refinery wide maintenance at the plant and is ready to go at full capacity. It will be “just in time” to make up the anticipated shortfall in middle distillate demand expecting to increase after the powerful 9.0 earthquake in Japan.

Closer to Japan, one of China’s largest refineries, Sinopec, recently suspended refining operations in Maoming due to high crude oil prices. The 270,000 barrels a day plant stopped delivering fuel and petroleum products in March 2011, because the Chinese government establishes the price for fuels delivered to the market by their local refineries.

Those fuel prices are equivalent to crude oil prices at $85 a barrel versus today’s Brent ICE posting of $113 a barrel. The difference in the allowed fixed price for fuels and the cost of crude oil leaves privately owned refineries with a negative crack spread.

PetroChina Co Ltd, which is Asia’s largest oil and gas company, has been having similar difficulties. It has been losing money in their oil refining segment resulting from an increase in crude oil prices due to the unrest in North Africa and the Middle East.

Diesel fuel prices on the U.S. West Coast are already amongst the highest in the country, and will be impacted by the March 11th earthquake in Japan. The bulk of the price action will likely fall on diesel fuel, but crude oil could be affected as well.

In the end it will not be about the price of Brent or West Texas Intermediate (WTI) crude oil but refineries being geared up to keep up with new found demand from Japan for their fuel products.

About the author - Bob van der Valk is a Petroleum Industry Analyst with over 50 years of experience in the petroleum, gasoline and lubricants industry. He has been often quoted by news media, most recently by Los Angeles Times, and his opinions solicited by government entities, in addition to his daily business of managing large scale supply and marketing operations.

All We Need to Survive: Water, Food and …….Gasoline!

Dateline: Terry, Montana
June 3, 2009 - 11:30 MST
By: Bob van der Valk

While the market sorted itself out yesterday, I was busy trying to keep from running out of water at the Bob's Big Boy Ranch in Terry, Montana. At one point we not only had our artesian well down but our hard water well had shut down as well. Unexpectedly, we had to make a quick trip and run out to the Terry Super Valu grocery store to stock up on bottled water. We may well be having a similar problem happening right now in the refining and petroleum business.

With crude oil being pumped out of the ground like water, any interruption will cause consumers to look for options to maintain some sense of normalcy. In our case, we almost decided to move back in with our daughter Inger and her family while the repairs were being made. But, what do we do when we run out gasoline? We can't do anything especially when living out in the country where long distances have to be covered by car or truck every day.

The Department of Energy statistics were bearish for diesel and neutral for gasoline today. The wholesale spot market price is down 4 cents per gallon for diesel and no change for gasoline, so far. So far the July WTI crude oil price is down $2.21 to $66.34 a barrel. The Nymex is off for now but there is doubt it will stay down that much at the close of business today with buyers perched to jump in as soon as they sense the low has been reached.

This year it's all about oil refineries being able to keep up with the expected increase in demand of gasoline for the upcoming summer driving season. Petroleum traders will be concentrating on the supply issues with the biggest focus on refinery gasoline output.

This morning's Department of Energy report is the tale of the tape for an upcoming fight between the bulls and the bears in the petroleum market. There are plenty of points to go around supporting both sides of the arguments to reach conclusions that crude prices and therefore gasoline prices may either shoot like a rocket or go back down with a bullet.


President Obama was greeted by Saudi King Abdullah upon landing in the Middle East today. He also received the news that the Saudi Arabian Oil Company Aramco had raised their crude oil prices from $1.05 to $3.25 a barrel for shipments in July 2009. The heavy crude oil is the one at the lowest with the light crude oil selling at the highest price. All of their crude oil prices are ratcheted up or down from the posted Brent crude oil price.

Our water situation will be resolved within a day or two but the current market situation for gasoline prices will continue to play itself out throughout the summer months. Right now the Four Corners gas station in Terry still has plenty of gasoline in the tank but it us 10 cents per gallon more today then it was a week ago.

We better keep the horses saddled up and ready just in case we will need them for back up. There may come a time when I will have start reporting the prices of hay and alfalfa instead of gasoline.

Will Motorists Suffer a Memorial Day Gas Price Hangover?

Dateline: Terry, Montana
By: Bob van der Valk
05-26-2009 10:00 AM MST

The July WTI crude oil price is a basic no change down 21 cents to $61.46 a barrel. The spot market gasoline price is up 1 cent per gallon and diesel no change so far this morning. The average price for regular unleaded gasoline is $2.421 per gallon in the U.S. with the West Coast at $2.667 per gallon.

U.S. motorists were expected to drive a little more this Memorial Day weekend with renewed optimism that the economic slump has hit bottom. Expectations of gasoline use were put at 1.8% higher than Memorial Day last year with the economy in the recovery mode.

The consumer confidence index for May jumped to 54.9 from 40.8 in April 2009. The index is now at its highest since September 2008 based on a graph published by the Confidence Board based on research done by TNS, Taylor Nelson Sofres PLC is the world’s largest custom market research company in 80 countries, shows the following:

Over the weekend we did have some bad news with the possibility that Nigerian violence will cut oil output. ChevronTexaco was forced to cut off about 100K barrels of crude oil supply representing about one fourth of the total output for Nigerian crude oil. Most of that crude oil is destined for U.S. refineries and any interruption in the supply of crude oil will have an immediate impact on prices.

On top of that North Korea successfully set off an underground atomic blast and also fired off a couple of missiles over the weekend. This was in an apparent attempt to prove that they are going to be capable of launching an atomic weapon at any of their enemies.

By far the most positive comment for stability in the immediate future of oil prices was the statement released by the Saudi Arabia oil minister Ali al-Naimi over the weekend. He stated that OPEC will likely stay the course with regards to production cuts at the upcoming meeting this Thursday in Vienna. This was an advance signal for discussions between him and Steven Chu, the U.S. Energy Secretary, to show support their in assisting the economic recovery.

Take a little "Hair of the Dog" if you are having a weekend hangover but keep your gas tanks full as gasoline prices are not expected to come back down before the fall of this year.

It’s a Real Gas to Talk Gasoline Prices

Dateline: Terry, Montana
May 18, 2009
By: Bob van der Valk

My wife and I recently struck up a conversation with a very nice elderly couple while shopping and waiting in line to have some fabric cut at the Jo-Ann store in Bellevue, Washington. The wait was almost 45 minutes so we had plenty of time to discuss various subjects. Our conversation quickly turned to the state or our economy after comparing how many years each of us have been married to our spouses.

Crude Oil and Gasoline Prices Undergoing Stress Test

Don't look now, but the price of crude oil has been moving sharply higher over the last couple of weeks That is now up 80 per cent over the last 3 months with the price of WTI crude oil increasing from $32 to $58 a barrel in just a short thee months. The price of was up another 85 cents per barrel early Friday heading towards the $60 a barrel mark by the end of the day. Fuel prices for gasoline and diesel are going up in lockstep with another 2-3 cents per gallon increase today.

At the same time the national gasoline price per the AAA fuelgauge report from went from $1.56 to $2.16 per gallon as of today. This would normally set off alarm bells in the media with articles about suspected gas price gouging. These would then be followed up with the usual threats of investigation by head line grabbing politicians and divergent government agencies.

Reporters have been quick to report that at $2.16 we are still paying almost a buck and a half per gallon less than we did before Memorial Day last year. Their question of the day remains: “Why are prices now heading back up to $2.50 on the West Coast and the national average to $2.25 per gallon?”

In plain and simple terms the refineries have finished making their switch to summer gas and it reduces supplies by 10% per cent. This year, however, as gasoline prices have been going back up the price of crude oil has been dragged up along with it.

Along with that President Obama's current budget proposal, which must be approved by Congress, includes ending "unjustified tax loopholes" for oil companies. That will raise $26 billion over the next 10 years for alternative energy development.

The White House rejected as "unfounded" industry claims that by ending the tax breaks it would take a significant toll on US domestic oil and gas production. It said oil and, to a large extent, gas are internationally traded commodities whose prices are determined on the world market. "The oil and gas subsidies are costly to the American taxpayer and do little to incentivize production or reduce energy prices," the administration said in its budget package submitted to the Congress.

The budget also includes increasing federal road taxes on gasoline and diesel with 10 and 14 cents per gallon being added to the 18.4 and 24.4 cents respectively.

Price of gasoline is not going to going back down any time soon perhaps not until the fall of this year. But that will be another story for another day.

Flu Bug Bites Oil Market

Petroleum traders have been keeping a weary eye on the news about the swine flu spreading to other parts of the world. But by now they are used to having the least amount of bad news effect crude oil and in turn fuel prices.

However, the current scare may be short lived as the real story behind the headlines is just beginning to develop. Another medical authority in the field, Dr. Jay Gordon from Santa Monica, CA, has been sending out Twitter messages in the last few day to let people know that the World Health Organization has only able to confirm 7 deaths in Mexico, from the new H1N1 swine flu virus strain, not the 20 being reported far and wide by various media outlets.

Dr. Gordon says that the reason the swine flu pandemic being hyped by the media is to get people to obtain unnecessary vaccinations with Tamiflu to prevent from getting this disease.

The WTI crude oil price is went another 22 cents to 49.92 a barrel on fears that this new flu strain is going to further depress already bleak oil demand. Gasoline and diesel spot market prices on the West Coast dropped 1 - 3 cents per gallon. Pump prices will follow and the average price may even get back down below $2.30 per gallon for regular unleaded gasoline by the end of this week in California. The average price of $2.05 per gallon for gasoline will dip by about the same amount to $2.02 per gallon for the whole of the US.

Oil prices tumbled yesterday under a sea of panic as "swine" flu fever gripped the world's media and the worlds oil markets. Although the probabilities of this evolving into a world wide killer pandemic are still small, the fears of such an occurrence happening are enough to spark short selling in the energy markets. Air travel has already been affected, with the current media hype exaggerating the outbreak of this new strain, as people avoid areas with outbreaks of the flu.

The other shoe will drop on diesel and jet fuel prices if this havoc continues any longer. Jet fuel will start backing up into the distillate stream of the refineries and cause a free fall in both jet and diesel fuel prices.

In other news the Shell refinery in Anacortes, Washington is still struggling to get back up into full operation and is now expected to be up as soon as tomorrow. The Shell and the Tesoro refineries in Anacortes went down on Friday, April 24th due to an unexpected power outage. That will keep fuel prices up and supplies tight in the Northwest US.

Another Day - Same Old Story for Crude Oil and Gasoline Prices

The van der Valk Gas Price Advisory for 4-17-09

Dateline: Issaquah, Washington
April 17, 2009 12:30 PM PST
By: Bob van der Valk

The May WTI crude oil price is up 35 cents to $50.33 a barrel at the close today. The wholesale spot market price for gasoline and diesel went up about a penny per gallon almost in concert with the crude oil price

It's another day - same old story in the petroleum markets.

First - The US Federal Reserve announced a 1.5% month on month decline in industrial production and capacity yesterday. Crude oil prices reacted the other way of expectations by going up this morning in reaction to that bad news

Second - Last week the International Energy Agency, headquartered in Paris, lowered its forecast for global oil demand for this year by 1 million barrels a day down to 83.4 million barrels, which is 2.4 million barrels a day below the 2008 level.

Third - US crude oil inventory levels are now at a 20-year high and refineries are running at just 75% of their current capacity. Fuel conservation has forced the oil companies to reevaluate their 2009 game plan in view of the uncertainties in our economy.

Fourth - Gasoline prices went up some more this week. It's no wonder the average motorist cannot figure out what will be happening to fuel prices in the next month or for that matter the rest of the year. The US average price for gasoline is hovering around $2.05 per gallon today per the AAA fuelgaugereport. The price on the West Coast is still around $2.32 per gallon.

Crude oil will continue to hover around the $50 per barrel mark when at the same time gasoline and diesel prices will be increasing steadily upward. On the West Coast the average price for gasoline is predicted to be $2.50 by Memorial Day and $3.00 by the middle of summer if the current trend continues but... you never know what may be around the corner when a world crisis, weather or refinery problems causes prices to go haywire again. Retail diesel prices will stay about 10 cents per gallon above gasoline prices. The remainder of the country will follow suit and their average price for gasoline will be around $2.50 per gallon by mid-summer.

Refiners have been successful in putting their foot firmly on the hose to constrict the flow of fuel to the market. They have reduced utilization below capacity before their usual planned, maintenance-related springtime reductions. Some shut production down completely earlier this year in order to perform spring maintenance known as turn-a-rounds. The combination of planned and unplanned reductions put 2009 refinery use at its lowest level in the last four years.

The US petroleum industry understands one thing very well and that is that you have to continue to make a profit in order to stay in business. It's either that or going broke and then they will be out of a job.

Go aplusk!

The Crude Reality and Market Update for 2-11-09

The March WTI crude oil price is back down a to a little over $36 a barrel today. Apparently there is no support for crude oil prices after comments made, by former OPEC President and current Algerian oil minister Khelil , that OPEC will make further cuts in oil production if crude stays below $40 a barrel.

Bearish factors for crude oil prices include:

1. Crude oil inventories have risen for the 18th time in the last 20 weeks when the DOE publishes its weekly inventory statistics later this morning.

2. Concerns that global oil demand will weaken further after the drop in Japanese machinery orders for the third straight month in December.

3. That the French economy will slip into recession in the first quarter of this year for the first time in 16 years, and that French business confidence and manufacturing may weaken further in the coming months.

Bullish factors for crude oil prices include:

1. The drop in the dollar index to a 1-week low.

2. Hopes that U.S. energy demand will increase if the US economic stimulus package is successful in boosting the US economy.

3. Comments from OPEC Secretary-General Abdalla el-Badri that the cartel is prepared to cut production again when it next meets in March.

4. The American Petroleum Institute on Tuesday said that gasoline stocks dropped by nearly 3 million barrels for the week ending Feb. 6 and the DOE statistics this morning supported that number.

5. Treasury Secretary Geithner's laid out general plans yesterday to fix the nation's ailing financial sector and resuscitate the U.S. economy. It was in turn greeted very coldly by the investment community, who just saw more of the same in recent attempts by President Barack Obama to stabilize the country's banks.

It will be another balancing day between the doldrums crude oil prices have been in and the continuing rise in gasoline prices in spite of depressed demand levels.

On the West Coast gasoline prices are up 5 cents and diesel is up 2 cents per gallon this morning. No hopes are on the horizon to see any relief soon as the pump.

The rest of the country is also now starting to react to production cuts and unanticipated maintenance problems at U.S. refineries with the ever upward movement in gas prices now reaching the $2 per gallon mark.

Washington state motorists should consider themselves fortunate that they don't have to buy gasoline in California today. The price there is already at $2.239 and climbing steadily upwards.

Another spike in the wholesale pipeline price of 7 cents per gallon has not yet been factored into the pump price. As California has led the price of gas down when the bottom fell out of the market last year, they will be showing the lead in the up market as well.

The Crude Reality and West Coast Market Update

March WTI crude oil went up $2 and was last traded back over $42 a barrel this morning. There has been no more downward talk after last Friday's skirting with the $40 a barrel threshold. That was due mainly to large long March position being forced to roll into April contracts at the lower number. The Nigerian rebels have called off their truce over the weekend. This has once again threatened that country's continuing to ship their most wanted sweet crude oil to the U.S.
On the West Coast the wholesale spot gasoline prices has been a strong performer for the last month but is now started to show some weakness down 5 cents per gallon this morning. But don't get your hopes up that pump prices will be coming back down any time soon. The average price in the U.S. is still headed to over $2 per gallon in the next week due to overall production cuts by the refineries. Diesel meanwhile is showing some strength with a 2 cent bump.

The price of gasoline is already at $2.20 per gallon on the West Coast per the AAA fuelgauge report. The break even price for unleaded regular gasoline at the spot market unbranded rack has been over $2.25 per gallon for the last week and that is where the overall price should be by the end of this week.

Crack spreads at the U.S. West Coast refineries are an amazing $35 a barrel today. There is a differential of 25 cents over the the branded by the unbranded wholesale gasoline price. That is the main cause for the strengthening of the refinery crack spreads as they do not have any surplus gasoline to sell in the spot market. So remember to keep your car's gas tank gauge on high.

Tomorrow's Gas Prices, Today

The van der Valk Fuel Price Projection

The price of gasoline for February 9, 2009 will be:

Los Angeles/
Long Beach
2.180
Up .1 cent

San Diego
2.252
Up 4.5 cents

Bakersfield
2.308
Up 2 cents

Las Vegas
2.124
Up .8 cent

Orange County
2.174
Up 1 cent

San Jose
2.187
Up 2 cents

San Francisco
2.246

Up .4 cent

Seattle
2.159
Up 1.8 cents

Billings
1.729
Up 2.1 cents

Boston
1.892
Up 1 cent

*The methodology in determining tomorrow’s gasoline prices includes a spot market wholesale/refinery rack price differential calculated from the benchmark WTI crude/NYMEX gasoline prices. These are the average prices per gallon for regular unleaded gasoline includes all applicable federal, state and local taxes.