204 PETROLEUM TECHNOLOGY, ECONOMICS, AND POLITICS
Other things being equal, crude oil markets would tend to be stronger in the fourth quarter (the high demand quarter on a global
basis, where demand is boosted both by cold weather and by stock
building) and weaker in the late winter as global demand falls with
warmer weather. As a practical matter, crude oil prices reflect more
than seasonal factors and are, in fact, subject to a host of other influences. Likewise, product prices tend to be highest, relative to crude
oil, as they move into their high demand season - late spring/early
summer for gasoline, late autumn for heating oil. The seasonal pattern in actual product prices, again, may be less obvious, because so
many other factors are at work.
Price change patterns can vary between regions, depending on
the prevailing supply/demand conditions in the regional market,
especially in the short-term. Both geography and the unique quality of the gasoline contribute to the volatility of gasoline prices.
If sources for additional supply are limited, any unusual increase
in demand or reduction in supply gets a large price response in
the market. The price response, and the differences in regional
price movements, is critical to the way the oil market redistributes products to re-balance after an upheaval. A price increase
in one area calls forward additional supplies, which might come
from other markets in the United States, or from incremental
imports or they may also be augmented by increased output from
refineries.
Ultimately, oil prices can only be as high as the market will bear,
as was evident during the late summer of 2008. They may be higher
in areas with higher disposable income, where real estate values,
wages and other measures of economic activity indicate that the
market is more robust. However, if they rise higher than the market
will bear, consumers will seek substitutes or downsize their cars
and make other adjustments that reduce their consumption. If the
local area offers unusually high profits, competitors will quickly
enter the market, finally pushing prices down.
Crude oil prices are the most important determinant of
petroleum product prices, and often the most important factor in
price changes as well. Crude oil prices reflect an overall market
balance — when crude oil prices are low, reflecting an oversupply,
product prices will also be low; when crude oil prices are high,
reflecting undersupply or high demand, product prices will also
be high. When the price of crude oil moves up or down on a
Other things being equal, crude oil markets would tend to be stronger in the fourth quarter (the high demand quarter on a global
basis, where demand is boosted both by cold weather and by stock
building) and weaker in the late winter as global demand falls with
warmer weather. As a practical matter, crude oil prices reflect more
than seasonal factors and are, in fact, subject to a host of other influences. Likewise, product prices tend to be highest, relative to crude
oil, as they move into their high demand season - late spring/early
summer for gasoline, late autumn for heating oil. The seasonal pattern in actual product prices, again, may be less obvious, because so
many other factors are at work.
Price change patterns can vary between regions, depending on
the prevailing supply/demand conditions in the regional market,
especially in the short-term. Both geography and the unique quality of the gasoline contribute to the volatility of gasoline prices.
If sources for additional supply are limited, any unusual increase
in demand or reduction in supply gets a large price response in
the market. The price response, and the differences in regional
price movements, is critical to the way the oil market redistributes products to re-balance after an upheaval. A price increase
in one area calls forward additional supplies, which might come
from other markets in the United States, or from incremental
imports or they may also be augmented by increased output from
refineries.
Ultimately, oil prices can only be as high as the market will bear,
as was evident during the late summer of 2008. They may be higher
in areas with higher disposable income, where real estate values,
wages and other measures of economic activity indicate that the
market is more robust. However, if they rise higher than the market
will bear, consumers will seek substitutes or downsize their cars
and make other adjustments that reduce their consumption. If the
local area offers unusually high profits, competitors will quickly
enter the market, finally pushing prices down.
Crude oil prices are the most important determinant of
petroleum product prices, and often the most important factor in
price changes as well. Crude oil prices reflect an overall market
balance — when crude oil prices are low, reflecting an oversupply,
product prices will also be low; when crude oil prices are high,
reflecting undersupply or high demand, product prices will also
be high. When the price of crude oil moves up or down on a