The disadvantage of low oil prices: A primer

If you’re a keen watcher of oil and energy generally the news is old, old, old. But for many people the downsides of cheap oil that might be familiar to us – mainly decreased investment storing up future demand crunches/price spikes; and lowered incentive to invest in alternative energy – are news.This Washington Post is today running a lengthy and popular story canvassing all these issues.

One writer at SeekingAlpha makes the case that alternative energy investment is dead, as figures from the API yesterday shows gasoline demand is starting to rise.

Meanwhile punters are certainly wondering why gasoline is not becoming ever cheaper as oil prices (particularly the widely quoted WTI contracts, which have come under significant fire) continue to fall. The API has been defending big oil, but its case does not come across very convincingly in this story:

“We’ve heard people say, ‘Oh, the refiners are trying to manipulate the prices,’ but it just isn’t true,” API Chief Economist John Felmy told reporters on a conference call.

And then…?

API figures show that U.S. refiners made a record amount of gasoline in January, and U.S. gasoline imports also rose in the month, even after government data showed demand for gasoline fell in 2008 for the first time since 1991.

Average U.S. retail gasoline prices have risen to $1.95 a gallon, up from $1.84 a month ago, according to automobile and travel group AAA, as refining companies like Valero Energy Corp (VLO.N) and ConocoPhillips (COP.N) announced production cuts to fend off weak profit margins.

“With refiners cutting back as much as possible to avoid losses, pressure is on inventories to supply the additional barrel of gasoline,” Boston-based Energy Security Analysis Inc said in a research note Thursday. “As these supplies diminish, the wholesale price of gasoline will spike, leading to higher prices at the pump.”

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