Economics of Gasoline - How To Short Sell The Oil Companies

High gas prices are back.  It's time to review ways to save money on gas.

But I don't intend to talk about conserving gas through substitution to biking, running, or riding the bus to work.  The problem of high fuel prices goes far beyond that, and could easily cause setbacks in the US economic recovery - if there really is one.

Let's start with good ol' reliable supply and demand.  Prices are higher right now because the traders who buy oil on the commodities exchanges are saying with their pocket books that the supply of safe, reliable production of oil is heading lower relative to demand.  Whether we agree with their assessment is irrelevant.  But what is clear is that we need to shift the supply curve to the right to get prices to come down.  If the traders won't do that, how can we as consumers do it?

Before I go further, I'll point to some interesting info regarding the last time oil had a huge run.  In 2008 saw oil a peak price at  $145.29 on July 3.  Just 10 days later, President George W. Bush announced a repeal of the offshore drilling ban, and oil made a steep and steady decline (along with the economy) to well below $50 per barrel by December 2008.  I don't believe for a second that Bush intended to allow drilling - it was simply  a bluff, an ace in the back pocket.  Even if he did intend to allow drilling, it would have taken years to get production on line.  However, the mere chance that more supply could be coming on line in future years was enough to help the price come down; way down.

Remember, oil is traded in futures contracts.  The futures are trying to predict what the price of oil should be in the coming months.

So, again, how can we as consumers get the price of oil to fall?  Answer: we can use the properties of distribution models and futures trading against the oil companies, and force them to sell gas at lower prices.

Distribution models are everywhere, and these days they are run with high efficiency.  Imagine a tanker filling up with oil right now at a port in Alaska.  There is a port somewhere in Texas expecting that tanker to come to port in the near future.  At that port in Texas, there is a pipeline company expecting to transport the oil from the tanker, and eventually route it to an oil refinery somewhere in the mid-west.  That oil refinery is expecting the oil to come in so they can make gasoline and other products.  There is a distributor expecting to haul that gasoline to nearby stations, and stations that are expecting to sell the gasoline at a certain volume per week.  All of this is done with "just in time" precision to ensure that enough gasoline is on hand to the members down the chain at a time when it is needed.

That's where we come in.

Instead of filling our cars full of gasoline every time we stop to fill - and hauling it around while using it slowly, meanwhile letting the oil companies take our money for gasoline we will not use until sometime in the future - fill up with a half tank of gas, or better, a set dollar amount (that is at or below a half tank), keeping more of your money in your pocket, and paying less upfront for future consumption.  We will be placing "puts" on their future price of oil by paying less in advance for gasoline we'll burn in the future.

Our tank shorting will do two things immediately.  One, it will immediately increase the amount of gasoline inventory every station has on hand relative to their normal draw rates.  When the distribution company comes to fill the tanks for the station, they will not dump as much gasoline off their tanker trucks.  With less gasoline leaving the storage tanks of refineries, they will have to slow production (or pay money to someone else to store the excess gasoline).  Reduced production would mean less oil draw from their pipelines, which would mean the pipeline companies would have to store more offloaded oil from tankers (or pay someone else to store it).  Rather than do that, they offload less oil from the tanker.  The tanker sits in port longer now, since the offloading rate is slowed.  Meaning the tanker company now starts a dispute with the purchaser of the oil over who will pay the costs of the extended stay at port.  Meantime, another ship is already on its way to port with more oil.  That tanker arrives while the other tanker is still docked.  Now the tanker company has to pay to dock the second tanker, effectively "storing" the oil.

Two, rather than allow this backlog to happen and disrupt the supply chain, the oil companies will try to entice us back to the pump by reducing the price of gasoline in an attempt to ease the onslaught of higher inventories.   This action would effectively take some wind out of the sails of the futures prices of oil, which would further reduce the price of gasoline over time.

Let's get started America.