Oil, Refineries, and Economic Costs
The more familiar number in respect of commodity prices is the spot price. The spot price is the price to purchase a barrel of crude or an ounce of gold or a pound of coffee or whatever is your favorite commodity at any given time. Nothing demonstrates the positive attributes of dealing in futures contracts like spot price analyses. For example, suppose six months ago you analyzed all the available information and you placed a bid to purchase oil now at $60 per barrel. Compare that to the current spot price of approximately $70 per barrel, and you easily understand the savings the futures contract could bring your company. Of course the situation also can operate in the other direction. Therein lie the benefits of hedging the transaction - but that is very off-topic.
What does all this have to do with refinery capacity? The obvious question is why would oil companies want to invest the funds to increase refinery capacity just to sell gasoline to consumers at lower prices? Oil company profits are at record levels. Although it will be very costly for them to repair their damaged refineries, it is a cost they easily can absorb without their share prices taking a major hit. After all in recent weeks BP experienced several problems including a leaning platform in the Gulf of Mexico, an explosion and a leak in the pipeline at its Texas City, Texas facility, and a very angry division manager who claims the problems were created as a trap to terminate his employment. Did these items receive much attention from the general press? No - and these issues began at least a month before Hurricane Katrina. Only the Galveston Daily News: http://www.galvnews.com/ seems to find BP's series of difficulties important enough to explore - and the Daily News does excellent work with its reportage. Do these problems affect BP's operations? Yes. Did these problems affect the BP share price? Perhaps only very negligibly, and those alterations could be attributed to general market dynamics.
What is the solution to the oil crunch? It is another vicious cycle: If the number of refineries does not increase, consumers will need to conserve oil. If conservation measures are effective, demand for oil will decrease. Then the incentive to increase production will diminish. Less production means lower supply required by lower demand, and that yields a higher equilibrium price until some new market variable enters the mix.
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