Oil jitters

Posted at 9:09 AM on November 29, 2007 by Bob Collins (0 Comments)

The explosion of an oil pipeline in Minnesota showed us all just how fragile the world oil market is.

Oil prices soared when word got out about the explosion.

The quick run-up in prices -- it had jumped $5 a barrel -- eased when it was revealed that the pipeline where the explosion occurred was already shut down for "planned maintenance," so there's no disruption in the supply of oil. By midmorning, it was up only $2.63, $2.29 $1.74. Move along, there's nothing more to see here.

Or is there?

"This latest blow to supplies could create a tense situation for oil markets, especially if OPEC decides against a production increase and if the United States experiences an unexpectedly cold winter. According to Poole, if these two negative outcomes were combined with a protracted pipeline shutdown at Enbridge, oil could end up breaking the much-vaunted $100 barrier," according to an analysis on the Forbes Web site.

If nothing else, the situation refocused attention on the skyrocketing cost of oil. But something isn't adding up. Oil has reached record-high prices, but at least one oil company has reported lower profits. Why?

Chevron's CEO took a swing at that in a story posted on Fortune magazine's Web site today.

"At $90 a barrel, the cost of crude in a gallon of gasoline is about $2.25. In most states the federal and state taxes are 60 or 70 cents a gallon, so now you're up to at least $2.80 a gallon. Because the U.S. happened to be very well supplied with gasoline, that was the price it was selling for nationwide in most of the third quarter. Add the cost of transportation, refining, distributing, marketing - you're not going to make any money at that price. That's why our U.S. refining and marketing business did not make money in the last quarter."

Today (literally today) in Minnesota, gas prices are as low as $2.77 a gallon. The price of oil is well over $90 a gallon. Under this theory, Chevron would be losing more than 3 cents a gallon at these prices.

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