Streetwise Professor

March 22, 2012

Giving New Meaning to the Phrase “Crack Spread”

Filed under: Uncategorized — The Professor @ 10:39 am

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.

Print Friendly, PDF & Email


  1. Wow, talk about putting words in someone’s mouth. If you want to talk about incentives for *exploration and production* why do you make amateurish statements on the crack?

    BTW the May RBCL now is about $33.88 with 2077 contracts traded. The RB-Brent spread on my ladder right now is $16.60 / 16.70. I’m waiting for your article highlighting the greatly reduced volume in RBCL and HOCL due to WTI’s diminished status as a benchmark but I guess, well…

    By the way don’t forget the other parts of the barrel, which have been a lot more profitable lately.

    Comment by PK — March 22, 2012 @ 11:00 am

  2. Your concern for refiners is touching, but what has it got to do with upstream incentives?

    Comment by JtotheB — March 22, 2012 @ 12:20 pm

  3. @PK-I was just going off the gas price # Obama used, and the current oil price (roughly), and showing that his calculations were daft. I never claimed that was the market crack. But as it turns out, $.75/gal x 42 gal/bbl~$30/bbl which is very similar to the number you quote. And believe it or not, I understand that there are other cracks, other parts of the barrel, etc.

    You are totally missing the point. Totally.

    I’ve written about the benchmark issue. WTI’s decline as a benchmark is driven by infrastructure issues. Those infrastructure issues will be fixed, and that process is underway. Brent is on top now, but it has much more acute long term problems, due to declining production.

    @JtotheB-Concern for refiners? Huh? I have no clue what you are talking about. Re upstream incentives, downstream incentives, midstream incentives-my whole point is that the market will do a far better job of giving the right incentives than idiotic government policies.

    The ProfessorComment by The Professor — March 22, 2012 @ 1:19 pm

  4. “My whole point is that the market will do a far better job of giving the right incentives than idiotic government policies.”

    That’s your point? Markets are better than the policies of crackhead idiots? Wow! Imagine that! It’s so just easy isn’t it?

    Comment by andrewi31 — March 22, 2012 @ 2:16 pm

  5. Yes as to missing the pint – the roll of the government is, within Fairly enforced and administered law, to GET OUT OF THE G-D DAMNED WAY. Gangster government a la Obama uses the threat of new regulation and the capricious enforcement and distortion of existing regulation and the legal system (GM’s Bankruptcy, anyone?)to get money and keep power. As the the speech he gave it is a combination of Goebbels 101 “big lie” with the narcissistic solipsism that dominates this man’s “thinking”: ” how can those evil X’s say I am not doing my bit? Look at the speech I just gave and production is up!”

    Comment by sotos — March 22, 2012 @ 2:52 pm

  6. Pints, rolls? Fucking loser hour around here.

    Comment by andrewi31 — March 22, 2012 @ 2:56 pm

  7. Glad my typos could boost your self esteem Andrew! It obviously needs help, or maybe you should admire the way that your cheap shots can enrage other people to the point that they are forced to make mistakes that prove you superiority. Revel in your uber menschlikeit.

    Fucking Loser in Chief

    Comment by sotos — March 22, 2012 @ 3:14 pm

  8. Oh Andrew I did it again Ubermenshlichkeit! You inspire me!

    Comment by sotos — March 22, 2012 @ 3:22 pm

  9. Sorry Sotos. You guys throw around so much BS, such as “crackhead”, such as “Goebbels”, that it undermines your arguments, if not your characters. I shouldn’t mock typos, just wish your comment would have made more sense. Apologies.

    Comment by andrewi31 — March 22, 2012 @ 3:32 pm

  10. Ah, I am so honored that you have lowered yourself to point out how I can stop undermining my own character, and try to make more sense. It will forever be a mark against my sole (oopsie, soul!) that in pointing out the use of the big lie technique used by Obama to deny his own record and prior statements was advocated by Goebbels, I have gravely damaged the high level of discourse you maintain:

    “That’s your point? Markets are better than the policies of crackhead idiots? Wow! Imagine that! It’s so just easy isn’t it?.”

    The depth of argument, insight and razor like wit of the above astounds me – it is like Hobbes edited by Oscar Wilde!

    But that is not all you have in store for me – you lower yourself to concern yourself with my moral, spiritual and intellectual redemption that is the improvement of my character. The sin of describing a man who has written two autobiographies before the age of 50 as narcissistic may be beyond absolution. The error, the horror of being angry at flagrant intellectual dishonesty and using harsh language that has never been heard before in political debate shames me. I have shown the world my worthless character, my desperate intellectual dishonesty, and yet you take the time to point this out and give me the means to improve myself. I cannot express my gratitude.

    I stand in awe of you, and propose that you should edit Strunk & White so we can all reach your level of discourse, merged with a complete redo of the Nicomachean Ethics. You cannot deny what the world so desperately needs.

    Your humble and unworthy servant,


    Fucking Loser in Chief

    Comment by sotos — March 22, 2012 @ 4:27 pm

  11. @sotos-Personally I liked pint and roll better. Pint is a liquid measure as is barrel and roll does somehow seem appropriate to describe this government as in-Obama’s government rolled the taxpayers with the intensity of roided out Rocky Balboa training for his once in a life time fight with Apollo Creed.

    @Professor-You should NEVER EVER attend a carnival after that slur.

    Comment by pahoben — March 22, 2012 @ 8:04 pm

  12. […] Streetwise on the pipeline. […]

    Pingback by Friday Breakfast Links | Points and Figures — March 22, 2012 @ 8:15 pm

  13. @pahoben. Yes. I have indeed slurred all carneys unfairly. They should demand he change his name, for he brings discredit on their (by comparison) honorable profession.

    The ProfessorComment by The Professor — March 22, 2012 @ 9:04 pm

  14. “Sorry Sotos. You guys throw around so much BS, such as “crackhead”, such as “Goebbels”, that it undermines your arguments, if not your characters” well, SWP’s Twitterati pack does heart them some Goebbels-sized whoppers about Ron Paul — you know all those cute pimply faced college kids joining the thousands at his events from Seattle to Kansas City to North Dakota were all Seig Heiling white supremacists. @Reginal Quills told me so, it must be true, he’s backed by North Korean Chavezes or something. Which explains why that video of Russian missiles getting shipped via Tartus to Caracas is CGI. At least JFK had some real photos of Russian missiles in Cuba back in the 1960s. CGI will suffice for modern war whore propaganda.

    But ah, only leftoids and Occupy protesters get judged ‘by the company they keep’. Not SWP.

    Comment by Mr. X — March 22, 2012 @ 9:23 pm

  15. @Reginal Quills told me so, it must be true, he’s [sic Paul must be] backed by North Korean Chavezes or something.

    Twitter is the new crack.

    Comment by Mr. X — March 22, 2012 @ 9:24 pm

  16. We’ve got the same problem much worse in Europe.

    Right now the price of a litre of diesel – which nowadays fuels 50% of road traffic – is around £1.45. That price includes 20% VAT, so the pre-sales-tax price is £1.21.

    Within that price, however, there is fuel duty of around £0.61 (on which sales tax is levied; tax on a tax, IOW), so what you are charged at the pump, retail, for the actual diesel is £0.60. Adding fuel duty and 20% to that is what gets you the headline price of £1.45 a litre.

    Meanwhile, the ARA price of a tonne of diesel is about $1,040. Using the reference density of 0.845, this tells us that the price of a cubic metre of diesel is $1,231 and hence that the ARA price of a litre of diesel is $1.23.

    On current exchange rates, that’s £0.78. And hence there is a problem, in that all the retailer can sell it for is £0.60.

    In consequence, we are seeing in the UK a progressive (ha ha! See what I did there?) collapse in the fuel retailing networks. Not only has the number of fillings stations fallen by about 70% over the last 25 years, so that you now commonly have to drive several miles out of your way or make a special trip to find one. What is worse is that when you get there, nowadays you quite often find that the place has 8 out of 10 pumps closed because they are “out of stock”.

    I came into the biz in the mid-80s, and back then, for this situation to arise on any site was unthinkable. How can you make money when you’re out of stock of that which you sell? If an oil company manager had driven onto one of his company’s sites to fill up and found pumps closed because they were out of stock, heads would have rolled.

    Nowadays, of course, they couldn’t care less if they’re out of stock, because they’re losing money on every litre. And so they’re exiting or outsourcing the business wherever they can, or they’re turning themselves into C-stores to minimise the loss so that the trading arm can try to make money off the strategic short.

    We do seem to have reached the point now in the UK where the market simply cannot afford the retail prices needed to cover all the tax. If the retailer and wholesaler combined took a modest gross margin of, say, £0.07 to cover the costs of distribution, forecourt operation etc, then they’d need to charge £0.85 for a litre of diesel. With taxes, this would gross up to £1.74 a litre (US $6.60 per US gallon). The maximum price it seems possible to charge is about £1.50, however.

    I find it absolutely bizarre that when a government is responsible for 55% of the cost of something, they can then have the effrontery to suggest that its price is somehow the fault of its retailers. It is as though they were to blame the Scotch industry for the price of a bottle of Chivas Regal. It’s even more bizarre when, as happened a few years ago, a UK Prime Minister can suggest that the price of oil at $120 is too high and that “the Saudis” should do something to lower it. The Saudis were too polite to point out that the taxes the same PM levied on their oil were about $160, and that if they lowered their prices by $1, he’d simply put the tax up by the same amount.

    Incidentally, the latter is the only information you need to refute those whack jobs who think oil companies have suppressed technology that would allow cars to run on water. If this were possible, water would cost the same as gasoline.

    Comment by Green as Grass — March 23, 2012 @ 4:12 am

  17. You are being very disingenuous. The RB crack has been worse, a lot worse over the last few years. In fact it’s been negative but guess what, the refiners survive and the upstream producers do just fine. The crack is separate to the upstream profit as you well know.

    Obama mentioned Gasoline price in passing, I’m guessing, as its what most Joe Sixpacks think of, he wasn’t ragging on refiners or accusing them of price gouging so why did *you* bring the crack into it and compare the head of state to a drug addict? A drug addict! Seriously, why?

    It’s not clever and it doesn’t enhance your rep. I’d expect better.

    The main driver of the last run up in gas prices is crude, not refining margin, and it’s set at a global level for the most part. You should reserve your bile for Gingich and the other clowns

    Comment by PK — March 23, 2012 @ 5:24 pm


    FWIW, of course.

    Comment by LL — March 23, 2012 @ 9:17 pm

  19. Well, let’s take this to reductio ad extremis, and reductio ad absurdum, SWP.

    It may not seem like it, but bear with me.

    The politicos have, for a very long time, engaged in the fiction that they are “large and in charge” when it comes to the economy. Remember Clinton’s “it’s the economy stupid”? Both parties play the game.

    Here it is:

    Gazrpom, which as you have noted previously, has a monopsony on oil and gas, as you yourself have posted on this blog.

    Gazprom is 51% controlled by the Rooshan guvmint, meaning Putler and his pals get to rake off as much as they want out of Gazprom.

    As you recall, there was a gas shutoff during 2009, when Roosha shut off the gas going to Europe through Ukraine’s pipelines, and people in Europe froze to death.

    Bear with me.

    At the time, as you know, and have talked about, Ukraine’s Naftohaz and Gazprom signed a contract for natural gas, with a formula tying the price of the gas to the price of oil.

    That resulted in an eventual price to Ukraine’s Naftohaz of $400 per bcm (metric).

    The Prime Minister at that time was – Yulia Tymoshenko.

    Bear with me.

    Now, the current band of thugs in government in Ukraine is charging her with — “treason.”

    Apart from all the political questions and intrigues, and apart from the fact that there really is no “market” as such in this situation, the current government claims that she “should have been able to get a price of $250.”

    The current government has been trying for well over a year to negotiate a lesser price with Gazprom – but has not been able to do it.

    And even though they haven’t been able to do it in well over 1 year, she is currently sitting in jail, and on top of that, being accused of “treason” – for signing a contract.

    There it is – the arrogance of unchecked, corrupt government.

    Through government holdings in various government majority-owned corporations, Putler has managed to accumulate several billion dollars, and has built himself a $4 billion palace in Sochi.

    When Maxine Waters says in a Congressional hearing that “we” – meaning Dems – want to take over the oil and gas industry, and when Obama rails against the oil and gas industry, it’s not just the political gamesmanship about controlling the economy in which both parties have engaged for quite a while.

    They look at what Putler has, and they say – “we want the same thing.”

    A couple of the comments above touch on the same thing (GM’s bankruptcy, the price of a bottle of Chivas).

    I know the situations are different in the 2 spheres – currently.

    But I’m pretty sure I know where Obama and Maxine Waters want to be, through government – they want to have $4 billion palaces, just like Putler.

    Don’t believe that they want to take over? Obamacare, anyone?

    Comment by elmer — March 24, 2012 @ 9:14 am

  20. @LL-thanks for that link. A friend sent it to me a little before. Going viral apparently. My last post critiques that ID piece.

    The ProfessorComment by The Professor — March 24, 2012 @ 3:33 pm

  21. PK-you are being a moron. My post had not a goddam thing with whether the crack is high or low today compared to the past. It hasn’t a goddam thing to do with the profitability of refining, or sympathy for refiners, or any of that. It is aimed at Obama’s incoherence on the gas price issue, said incoherence indicated clearly by (a) his suggestion that refining margins-whatever they are-is a profit, and (b) his inability to calculate exactly what that margin is (due, apparently to an inability to distinguish between barrels and gallons and being challenged on arithmetic).

    And mentioned gas in passing? Are you kidding? He’s been yammering about energy virtually non-stop for going on 2 weeks now. Incoherently yammering. He is trying desperately to convince Joe Sixpack that energy prices-and gas prices in particular-are not his fault, but are the fault of greedy energy companies.

    And spare me the faux outrage. “You’re on crack” is rather commonly used hyperbole used to refer to someone who talks gibberish-and yammers incoherently. Get a grip.

    And I know very well that high refined prices are a consequence of high crude prices, not high refining margins (not that has anything to do with this post). See my post from today.

    Insofar as reps are concerned, you apparently have none so I couldn’t care less about your opinion of mine.

    The ProfessorComment by The Professor — March 24, 2012 @ 3:43 pm

  22. SWP – is it really necessary to slam the good folks in Oklahoma to make your point?

    Just askin’

    Comment by elmer — March 24, 2012 @ 10:32 pm

  23. God doesn’t like all your g-d’s SWP. And I’m pretty sure the Almighty isn’t amused by all the false witness being spread by your Goebbelsian Twitter buddy Reginald Quill either.

    Comment by Mr. X — March 25, 2012 @ 12:45 am

  24. This article is not about economic theory per se, but there’s a statement in it that might interest you, SWP, from Nobel Prize winner Eric Maskin:

    “I get annoyed by the claim that ‘the invisible hand’ — i.e., markets by themselves — will take care of everything,” he said. “We know, from theory, that for very good reasons some markets are not going to work the way we would wish them to,” a statement to which the financial and housing market crashes of recent years attest, he added.


    From where I sit, it’s the distortion caused by government that led in large part to those crashes.

    And from where I sit, I recall some time back when, as part of the Windfall Profit Tax on “obscene” oil and gas profits, the guvmint forced a classification of oil into “old” oil and “new” oil – leading, as one might expect, to ways to get around the classifications and even criminal prosecutions.

    Plus, there were tax incentives for “deep gas” and drilling below 10,000 feet.

    All part of oil and gas tax shelters, based on the tax code at that time. All based on guvmint actions.

    But, all in all, how could anyone disagree with your comments about Obama? I think you are exactly right.

    Comment by elmer — March 25, 2012 @ 8:36 am

  25. It looks like “The Oklahoman” agrees with you – here’s the editorial opinion from March 25, 2012 about Obama’s visit to Cushing:


    We learned that when it comes to energy, Obama has a difficult time hiding his disdain for fossil fuels and his romance with nontraditional sources of energy such as wind and solar. The president mentioned during his speech in Cushing that he had been to Nevada the day before to visit a solar factory. “We’re always thinking about what’s the next thing,” he said, referring to the United States, “and that’s how we need to think about energy.”


    We learned that the administration’s spiking of the Keystone XL pipeline project from Canada to the Texas Gulf was the fault of Republicans in Congress. They decided “it might be a fun political issue, decided to try to intervene and make it impossible for us to make an informed decision,” Obama said.

    Hmmm. After Obama first nixed the pipeline plan, which had been studied for three years, Republicans demanded as part of a deal to temporarily expand the payroll tax cut that the president revisit Keystone within 60 days. He agreed to that stipulation. Then he rejected Keystone again.

    Comment by elmer — March 25, 2012 @ 11:18 am

  26. @elmer. Not slamming the good folks in OK. I presume you are referring to the wilderness year remark. Not a slam at OK or its people. Just a realistic characterization of a temporary detour in my academic career.

    The ProfessorComment by The Professor — March 25, 2012 @ 8:55 pm

  27. That $1.20 per barrel is an obvious transcription error. What he said is “one-twenty per barrel” not “dollar twenty per barrel.” The idiot who transcribed this made the mistake, not the president. I disagree with Obama on most things related to energy policy, but he understands that oil was $120 per barrel and not $1.20 per barrel or $1.20 per gallon at that time. There’s enough real quotes from him to embarrass him, no need to make up extra.

    Comment by ptuomov — September 4, 2012 @ 5:14 pm

RSS feed for comments on this post. TrackBack URI

Leave a comment

Powered by WordPress