#3) Refiners and Retailers See Profit Margins Squeezed With the rising cost of oil, America’s refiners are taking a gamble
by keeping low inventories of crude and lowering their refinery
utilization rates at the same time. According to the Energy
Information Administration, gasoline stockpiles fell by 153,000 barrels
to 208.8 million barrels in the most recent week.

Refinery utilization, which normally hovers in the 95% range
at this time of year, is currently at just 88.6%. In fact,
it’s at the lowest level for early summer in 15 years.

If refinery inputs are at 15.4 million barrels per day (mainly crude oil),
a one-percent change in yield is a 154,000 barrel-per-day
(4.7 million gallons) change in product volume. U.S. consumption
of gasoline is around 388.6 million gallons/day.

So those few percentage points mean a real difference in supply …
which means higher prices.

Meanwhile, demand for motor gasoline over the past four weeks
declined by an average of 9.3 million barrels per day — down 2.1%
from the same time a year ago, and down 5% from its peak of 21.3
million barrels a day on January 4, the EIA reported.

This lessening of demand is the excuse the refiners use for the low run
rates. Since American consumers are using less gasoline, they say
they need to process less. But less supply drives up prices,
so consumers use less gasoline — it’s a vicious circle.

While rising input costs have squeezed refinery margins mercilessly,
gasoline retailers — gas stations — are also seeing profit margins
tighten to the vanishing point.

In 2007, the average markup of gas sold at the pump was 14.3 cents
per gallon over what the owner paid, according to data from the National
Association of Convenience Stores, the trade group for the stores
that run more than 80% of the country’s gas stations.

The profit, or net margin after all expenses have been figured in,
has now shrunk to a measly 1.5 cents a gallon!

Now, with the price of gasoline rising, charges for credit card
transactions are rising as well, and many gas station owners are
making no money at all.

That’s why Exxon, the most profitable company in the history of the
world, announced in June that it is selling the 2,200 gas stations it owns.

Will it find buyers for those gas stations? If not, we can expect gas
stations to close. And we may see gas stations across America close
anyway, as station owners gets squeezed out of existence.

Some rural areas are served by only a few gas stations … as they start
to go out of business, it may become very difficult for some Americans
to buy gasoline. And that will lead us to a whole new problem …

Prepare for Hoarding and a
Recession-Turned-Depression

Why hoard? Well, when the price of gas rises 10 cents in a week,
as it did in my neighborhood, it starts to make economic sense
to hoard gas. Say you run a lawn service that uses 500 gallons
of gasoline a week. If you buy next week’s allotment ahead of time,
you can save $50 a week.

And if refinery utilization is so low that gasoline stations simply run out —
or a massive hurricane takes out refinery capacity — then you’ll see
hoarding kick into overdrive. This will only deplete stockpiles that are
already near historic lows, making the whole situation much worse.
Eventually, we may get to the point where you are unable to buy gas.

I’m talking about actual gasoline shortages … massive unemployment
and foreclosures … evicted families living in tent cities and cars they
can’t afford to drive … maybe, if things get really bad, food shortages
and food and fuel riots.

At $7 gasoline, those making less than $25,000 a year will see gasoline
expenditures go from 7% of their income to 20%. For some people,
it simply won’t be worth it to drive to work.

Factor in the airlines parking planes, delivery trucks no longer running,
fishing fleets staying in port, and car manufacturers going out of business.

Wait a minute — car makers going out of business?! Yep, GM is on
deathwatch now, and it’s not getting better. In fact, according to a
leaked report from J.D. Power and Associates, the June seasonally adjusted
annual sales rate will plunge to 12.5 million vehicles, down from 16.3 million
last June.

Add it all up, and America has the ingredients for a major economic collapse.

And Yet Oil Demand Is
Still Skyrocketing Globally!

Will reducing U.S. demand cause oil prices to plummet?
No, because demand in emerging markets is accelerating, and even if the
global economy slows, that won’t stop them. Much of China’s growth is
fueled by internal spending now. They may not like it if Americans are
out of work, but they’ll carry on.

Just think: How bothered were you by the collapse of the Soviet Union?
A major superpower hit the skids in 1985 and imploded in 1991. Did that
adversely affect your life in any meaningful way? I’m not saying a severe
recession in America won’t affect China … just not as much as we might think.

This year, emerging markets are overtaking the U.S. in consumption of oil
for the first time, and it won’t be long before they consume more than the
entire developed world.

At the same time, internal demand is rising in major oil producers and exporters.
Over the last three years, oil consumption among OPEC members has grown
by more than 5% a year. Hence, their exports go down and prices go up.

So while America’s car sales may be hitting the skids, 6.6 million to 10 million
new cars, trucks and vans will hit the roads in China this year. India will
probably grow at an even faster pace, percentage-wise. Bottom line:

They’ll use every barrel of oil we don’t.

And the Rising Price of Oil Could
Even Lead to Severe Food Shortages

American agriculture directly accounts for 17% of our energy use,
or the equivalent of 400 gallons of oil consumed by every man, woman
and child per year, according to the most recent statistics I could find.

If the cost of fuel gets too high, farmers won’t plant. If truckers run
out of fuel, they won’t deliver food to supermarkets. If enough of this
happens often enough, people won’t just sit there and take it.
They will lash out.

Now, what would you say the odds are of this happening in a year
when we are on the brink of war with Iran … when meteorologists
say this hurricane season should be worse than normal …
and when refineries are keeping historically low levels of inventories?
I’d say better than average.

And the sad thing is, I’ve just barely scratched the surface of what
could go wrong this year. I’d say America is in real trouble.

- Sean Brodrick -

How to Protect Yourself — And Your Family