Giving New Meaning to the Phrase “Crack Spread”

Obama is in Stillwater, OK, where I spent a wilderness year before coming to Houston.  He then travels to beautiful Cushing, OK, where he will tout the construction of the Keystone XL Market Link connecting Cushing with the Texas Gulf.

Talk about chutzpah.  Unbelievable.  It is worse than the rooster claiming credit for the sun rising, because the cock doesn’t know any better, but Obama should.

Fact: the US government generally, and Obama and his administration particularly, have nothing to do with the construction of this pipeline.  It is an eminently rational commercial response to price signals.  It is the market in action.  It is what happens when the market is allowed to operate.

If Obama were a thoughtful, fair minded man, rather than a somewhat dim political hack and complete economic ignoramus bent on re-election, instead of conscripting Keystone into his demented narrative about his cockamamie energy policy, he would learn a lesson.  That lesson would be: market participants responding to price signals will undertake the investments necessary to produce and transform energy.  Maybe I should get out of the way and let the market work.

But Obama will never acknowledge any such thing.  The only thing he is invested in is a delusional energy policy that is determined to ride roughshod over price signals.  A policy that is predicated on a worldview that distrusts-and arguably hates-markets.  A policy that is hell-bent on subsidizing losers (the losses being a flashing red-light price signal) and stymieing winners.

And the hits keep on coming.  He wants to tax Chinese solar panels because the Chinese subsidize their production.  Look, solar is one of the biggest losers, but if the Chinese are going to be so generous as to make them less loser-like by selling panels below cost, we should thank them.  It means that the Chinese are bearing some of the cost of our stupidity.

But I forgot.  The solar manufacturing sector is teeming with Obama supporters and donors.  Go figure.

Taking heat on his energy policy, such as it is, Obama had the loathsome and aptly named Jay Carney (who makes me pine for Robert Gibbs!, which is a staggering thought) lecture the world on the subject.  Apparently anyone who disagrees with Obama’s policy has “severely diminished capacity.” (For a suitably outraged response by my eminent colleague Paul Gregory, check this out.)

Want to talk “diminished capacity” Jay?  How about this.  Thus spaketh Obama:

We have subsidized oil companies for a century.  We want to encourage production of oil and gas, and make sure that wherever we’ve got American resources, we are tapping into them.  But they don’t need an additional incentive when gas is $3.75 a gallon, when oil is $1.20 a barrel, $1.25 a barrel.  They don’t need additional incentives.  They are doing fine.

Overlook the confusing of barrels for gallons. Overlook the fact that Obama apparently believes that the gross margin between output price and raw material input cost is profit.  (If so, then WTF are those huge refineries costing billions of dollars virtually within view out my window from where I sit needed for? )

He. Can’t. Even. Do. Arithmetic.


There are 42 gallons in a barrel.  At about $110/barrel (the price of WTI at Cushing), one gallon of oil costs about $2.61: at $120+/barrel (the cost of the marginal barrel of something like LLS that drives the price of gasoline) one gallon of oil costs $3.

Meaning that the gasoline crack (the difference between the price of gasoline and the cost of the oil needed to produce it) is around $.75-$1.00.  A differential that must cover all refining costs (including, in the long run, the return on the immense capital invested in refining) and the costs of bringing the gasoline from the refineries to consumers.  (And by the way, refining is not noted as an extremely profitable business.)

The difference between the price of a gallon of gas and the price of a gallon of oil is not a profit to the seller of gasoline.  And it surely ain’t $2.50/gallon.

But we’re supposed to listen to him pontificate about energy, and have his pathetic flack challenge our intellect, without challenge.

It is a challenge to listen to him speak about energy, actually.  The challenge being keeping breakfast down.

Witnessing Obama hold forth on energy indeed brings the word “crack” to mind, but not in sense of the process of using catalytic processes to refine crude oil.  No, I’m reminded of another product of a chemical refining process, a white crystaline substance known to impair mental function, as in: if his recent speeches reveal what he believes about energy, he must be on crack.

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About Craig Pirrong 238 Articles

Affiliation: University of Houston

Dr Pirrong is Professor of Finance, and Energy Markets Director for the Global Energy Management Institute at the Bauer College of Business of the University of Houston. He was previously Watson Family Professor of Commodity and Financial Risk Management at Oklahoma State University, and a faculty member at the University of Michigan, the University of Chicago, and Washington University.

Professor Pirrong's research focuses on the organization of financial exchanges, derivatives clearing, competition between exchanges, commodity markets, derivatives market manipulation, the relation between market fundamentals and commodity price dynamics, and the implications of this relation for the pricing of commodity derivatives. He has published 30 articles in professional publications, is the author of three books, and has consulted widely, primarily on commodity and market manipulation-related issues.

He holds a Ph.D. in business economics from the University of Chicago.

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