Crude oil price vs. gas price---a market controversy

Crude oil is getting cheaper _ so why isn't gas?

AP - Sunday, February 15, 2009 12:31:21 PM

By CHRIS KAHN and JOHN PORRETTO

AP

Crude oil prices have fallen to new lows for this year. So you'd think gas prices would sink right along with them.

Not so.

On Thursday, for example, crude oil closed just under $34 a barrel, its lowest point for 2009. But the national average price of a gallon of gas rose to $1.95 on the same day, its peak for the year. On Friday gas went a penny higher.

To drivers once again grimacing as they tank up, it sounds like a conspiracy. But it has more to do with an energy market turned upside-down that has left gas cut off from its usual economic moorings.

The price of gas is indeed tied to oil. It's just a matter of which oil.

The benchmark for crude oil prices is West Texas Intermediate, drilled exactly where you would imagine. That's the price, set at the New York Mercantile Exchange, that you see quoted on business channels and in the morning paper.

Right now, in an unusual market trend, West Texas crude is selling for much less than inferior grades of crude from other places around the world. A severe economic downturn has left U.S. storage facilities brimming with it, sending prices for the premium crude to five-year lows.

But it is the overseas crude that goes into most of the gas made in the United States. So prices at the pump will probably keep going up no matter what happens to the benchmark price of crude oil.

"We're going definitely over $2, and I bet we'll hit $2.50 before spring," said Tom Kloza, publisher and chief oil analyst at Oil Price Information Service. "This is going to be an unusual year."

On the last day of 2008, gas went for $1.62 on average, according to the auto club AAA, the Oil Price Information Service and Wright Express, a company that tracks transportation data.

The recession in America has dramatically cut demand for crude oil, and inventories are piling up. So prices for West Texas crude have fallen well below what oil costs from places like the North Sea, Saudi Arabia and South America.

That foreign oil sells in some cases for $10 more per barrel -- and that doesn't even include shipping.

Brent North Sea crude, which feeds some East Coast refineries -- and therefore winds up at many gas pumps around America -- now costs about $7 more per barrel than the West Texas crude. Deutsche Bank

analysts say the trend should continue.

Historically, West Texas International crude has cost more. So nobody bothered building the necessary pipelines to carry it beyond the nearby refineries in the Midwest, parts of Texas and a handful of other places.

Now that the premium oil is suddenly very inexpensive, refiners elsewhere can't get their hands on it.

"It's so cheap," said Lynn Westphall, the senior VP of external affairs at San Antonio-based Tesoro, which owns a half dozen refineries on the West Coast and Hawaii. "But you can't just build a pipeline to everywhere. We know we can't get it."

Tesoro's refineries in North Dakota and Utah use locally drilled oil and Canadian oil, which also has been running about $10 more per barrel than West Texas crude.

So why not build more pipelines? Because investing billions of dollars over several years makes no sense when the prices could just flip a year from now to where they were before.

"How long is WTI going to be cheaper than Venezuelan oil? Than Canadian?" asked Charles T. Drevna, president of the National Petrochemical and Refiners Association. "You just don't build a pipeline like that."

At the same time, refiners have seen the same headlines as everyone else about job losses and consumer spending. They've slashed production just to avoid taking losses on gasoline no one will buy. Result: Higher gas prices.

"Why should a refiner produce more gasoline when the stuff we produce is not being used?" Drevna said.

Of course, complex explanations of the diverging price paths of West Texas crude and gas are unlikely to placate frustrated drivers. Memories of last summer's $4-plus gas have not receded.

"Drivers are being ripped off even more now than before," said Stuart Pollok, who was filling up recently at a Chevron station in downtown Los Angeles

. He pointed out Exxon Mobil Corp. reeled in billions in profits last year when oil prices

neared $150.

Others see the conspiracy reaching higher.

"It got really low during the elections and now it's going back up," said Christel Sayegh, a 23-year-old graphic designer in Los Angeles. "They do that every election, though, right?"

------

AP Energy Writer John Porretto reported this story from Houston. Associated Press Writers Jennifer Malloy and Ryan Nakashima in Los Angeles contributed to this story.

Creating and Maintaining a Competitive Edge

Creating and maintaining a competitive edge over your competition can be the key to success of your business in a very tight marketplace. Generally, it requires your business to know, absolutely, all the details of your competition while, at the same time, being completely secretive of your own details, at all time. To get an idea about how this is done, read more.

Exporting---Expanding Your Business

As a means of expanding one's market, exporting can be a lucrative choice especially when dealing with a saturated domestic marketplace. It can also be a challenging task for small- and medium-sized businesses. In Canada, however, help is available through various Federal programs. Learn more.

Franchising Your Business

Are you thinking to franchise your business? There are pros and cons in franchising. If your business is humming and ready to grow, growth through franchising can be a probable option... Read More:

Canada Small Business Financing Program

Canada Small Business Financing Program (CSBF)

The Canada Small Business Financing Program seeks to increase the availability of loans for establishing, expanding, modernizing and improving small businesses. It does this by encouraging financial institutions to make their financing available to small businesses. Under the Program, a small business must apply for a loan at a financial institution (bank, credit union or caisse populaire) of its choice. Application is not made to the Canada Small Business Financing Program Directorate. If the loan is granted by the financial institution, the federal government will reimburse 85 percent of the lender's losses in the event of default.

The Canada Small Business Financing (CSBF) Act was enacted in April 1999 to build on the success of its predecessor, the Small Business Loans Act. The Program's objectives are to streamline loan administration, improve its ability to achieve cost recovery and to extend financing that would otherwise have been unavailable to small-and medium-size enterprises.

While Industry Canada is responsible for the administration of the Program, financial institutions are responsible for all credit decisions and for making the loans.

How and where to apply for a loan

Application for a loan under the Canada Small Business Financing Program may be made at any bank, credit union, caisse populaire and / or any other financial institution. Application is not made to the Canada Small Business Financing Program Directorate.

There are approximately 1 280 lenders with about 14 600 points of service in all provinces and territories. Lenders are responsible for all credit decisions, making the loans, providing loan funds, and registering the loans with Industry Canada. Lenders are also responsible for the administration of loans.

List of Lenders

Eligibility

Eligible Small Business:

• business carried on in Canada;
• its purpose is for gain or profit, and
• for an existing business: the estimated gross annual revenues generated from all the operations within the small business of the borrower must not exceed $5 000 000 for the business' fiscal year during which the CSBF loan is approved, or
• for a new business: the estimated annual gross revenues generated from all the operations within the small business of the borrower must not be expected, at the time the CSBF loan is approved, to exceed $5 000 000 during the first 52 weeks of operation.

Ineligible Small Business:

• "farming" as defined in the 1980 Standard Industrial Classification of Statistics Canada, Major Group 01 — Agricultural Industries;
• charitable or religious organization;
• any business not operating for gain or profit (i.e. private club).

Interest rates on loans

Interest rates on loans may be either floating or fixed. The floating rate cannot be more than 3 percent higher than a lender's prime lending rate. Fixed rates cannot be more than 3 percent higher than the lender's residential mortgage rate for the term of the loan.

What is eligible for financing

CSBF loans can finance up to 90 percent of the cost of:

• the purchase or improvement of real property and immovables;
• the purchase of leasehold improvements, or improvements to leased property; and
• the purchase or improvement of new or used equipment.

The maximum loan amount a small business can access is $250 000.

Forms

• Canada Small Business Financing Program
• Capital Leasing Pilot Program

FAQs

For Lenders
For Small Businesses

Business Opportunities

More Than Moonlighting

By LAURA TIFFANY

Filed Under: Management, Business Ideas, Starting a Business

These entrepreneurs reveal what it takes to run two completely different businesses.

A lawyer with a chocolate business, a pilot with a crawfish company, an accountant with an ice house venture. Entrepreneurs sometimes find their lives split between seemingly incongruous businesses. Some intentionally turned a hobby or interest into a moneymaking venture, while others saw an opportunity for a side business and seized it.

Just as fascinating as how they came to own two disparate businesses is how they manage to sustain this double life. Whether it means keeping a suit at the factory or calling on friends in a pinch, these entrepreneurs share how they make it work.

From the Courtroom to the Rainforest

Criminal defense attorney Shawn Askinosie has made a name for himself with headline felony cases that have been featured on Dateline NBC and Court TV. But these days, chocolate is his top priority

After two back-to-back murder cases in the late '90s, Askinosie began cooking to relieve the stress of the courtroom. He graduated from outdoor grilling to pies and finally to cupcakes and desserts using premium chocolate. In 2005, he had an epiphany and realized that he wanted to make chocolate--even though he knew nothing about the business. "At that time, I didn't have any idea where chocolate came from. I thought it just appeared in stores," says Askinosie. "So I did what I do, and that's research and find things out. Within a few months, I was in the Amazonian rainforest of Ecuador studying cocoa harvest techniques."

He contacted people in the chocolate industry, both farmers and manufacturers, but found it wasn't easy to learn the business, as most chocolate makers keep their recipes and processes a secret. Askinosie worked in an Ecuadorian chocolate factory, sourced cocoa beans from farmers in South America and Mexico, and began acquiring equipment from Columbia, Scotland, Italy and Germany, some of it more than 100 years old.

Last year, Askinosie began building his factory three blocks from his law firm, Askinosie and Bilyeu LLC in Springfield, Missouri. The first chocolate rolled off the line in January, and now Askinosie Chocolate is available in specialty food stores across the country.

While he spends most days making chocolate, Askinosie keeps a suit in the factory in case of emergencies. "The chocolate has been receiving increasing amounts of time ever since my last jury trial, which was one year ago," says Askinosie. "I have a partner and associate [in the law firm, who] handle most everything and really only contact me when needed. For the most part, I am a chocolate maker."

Askinosie hasn't yet reached profitability--he anticipates that happening in 2008--but he's already implemented the same profit-sharing, open-book policy he employs in his law firm for both the employees and the cocoa farmers he directly sources his beans from and pays above fair-trade prices.

"I could see the possibility of me doing chocolate making for a long, long time," says Askinosie. "But it needs to be profitable also. That hasn't happened yet. I hope it does in the near future. But I'll always have my law career to go back to, in some fashion."

Seasonal Balance

For David Snell, his hobbies and personal interests have always directed his business decisions. In college, he began giving airplane tours of Dallas while studying for his piloting license. Despite going into the tech recruiting industry, he never gave up Starlight Flight as a side business. Later, he and a former college roommate started throwing crawfish boils for fun. They purchased a beat-up trailer and set up shop--again, on the side while Snell was working full time.

Today, he runs both Starlight Flight and Cajun Crawfish Company himself, plus a third company he recently added to his roster. "I just bounce back and forth like a ball," says Snell. "I go from one thing to the other and if I get bogged down, I've got a handful of assorted people who I've built relationships with who can help out."

Cajun Crawfish Company is Snell's main business these days. He's booked during crawfish season, which runs roughly from January through June, and expects to bring in $400,000 in sales this year. With help handling the phones, he keeps Starlight Flight running, calling on local pilot friends, who also help with the crawfish boils, to fly during Valentine's Day and Christmas, both popular flight times.

"For the past few years, I've just been living the dream," says Snell. "I get done with crawfish season and go to the lake and try to improve on a very, very poor golf game." To cover his summer living expenses, Snell started his third business, DFW Custom Wood Floors, which offers hand-scraped wood flooring.

Snell had his own floors done and was impressed with the group of men who performed the work. He noticed, however, that they had no marketing expertise, so struck up a partnership. Snell now helps the floor installers find jobs and collects a fee of $1 to $2 on each square foot. "That's an extra $1,000 or $2,000 [per job], and all I'm doing is referring business because I had the vision of, 'Wow, this stuff will sell itself,'" he says.

Snell's motto is to work smart and lean. He uses voice mail to manage appointments, the web to market his businesses and relationships with friends to help him out in the busy times.

Dealing with Cold Hard Cash

Roger Laney has been an accountant for more than 30 years and owned his own accounting firm for more than 20 years. While investing in some property on the side with two partners, HT Waller and Ruben Laurel, he came across an intriguing and possibly lucrative side business: ice houses.

Yes, ice. When someone asked him to lease property to a 20-foot-by-40-foot self-serve ice kiosk, Laney's initial response was "What? That's crazy." But 14 months later, he and his partners now run Alamo Ice and own five ice houses in San Antonio, Texas--the closest non-saturated area to their home base of Chipley, Florida. They also sell the machines in 12 counties they have bought licensing rights for.

While Laney still works full time at his firm, the ice-house partners take turns traveling to Texas once a month, and Laney has spent many nights and weekends building the business. But he says that once the machines are up and running, it's hands off. "That's the beauty of the ice machine business," says Laney, who adds that two of the biggest headaches small-business owners have are employees and collecting money. The ice machines have neither issue as they're managed and maintained by a contract company in Texas.

The partners plan to invest in 80 machines total in Bear County, Texas, and continue selling machines in their 11 other territories. At $130,000 each for full installation, it's a deep investment, but one that Laney says breaks even in 30 months. "I anticipate keeping both businesses for an extended period of time," he says. "Once we get the machines on the ground and operating, there's not a lot to them."

The Finisher

The Finisher

New Year resolutions usually take the form of setting goals with a specific purpose in one particular realm of your life; such as stop smoking, losing weight or flossing daily. While all these goals are admirable and possibly life improving; I have decided to take a less anchored yet equally challenging road to my resolve this year. Perhaps you are brave enough to jump on the wagon with me? My resolve is to be a Finisher! Very few people in this world are finishers; this is why success is often seen as difficult or unattainable. It requires a certain amount of self-discipline and tenacity to be a finisher. Imagine; you are at the starting blocks of a race, 100 meter sprint, or marathon; your choice. The starting pistol sounds and you take off at top speed thinking of all the glory at the end of this race; then, at the halfway mark you stop running and begin walking the track. Then you start to perform another sporting event; the long jump or shot putt for instance…. absurdly most people live their lives this way. Without exaggeration how many things do you think you have started and never finished? Most people are Starters; even though starting can be difficult, most of us manage to get at least that far. Even the world’s worst procrastinators start their projects when it comes down to crunch time. How many of us out there started guitar lessons or tennis lesson when we were younger? Do you have crafts and household projects that are 2/3 of the way complete and are serving no purpose because they are not finished? How many half done projects lay cluttered in your mind with the “someday maybe I’ll get to it” reminder going off in your head at inopportune times. What you may not know is that though those projects are out of sight they are not out of mind. Somewhere in your subconscious, there is that little nagging voice trying to figure out when you are going to finish. Those nagging thoughts are a major cause of stress and sleepless night’s in our lives. Not being a Finisher is inadvertently bad for your health; taking a toll on you physically, mentally and emotionally. Sadly, this kind of behavior is also bad for your self-esteem because you start to doubt your own ability to follow through on your own promises. This is not the type of relationship I want to have with someone; especially not with myself. The secret to being a success is to become a Finisher; see the task or project through to the very end. If at first you don’t succeed; dust yourself off and try again should be the attitude taken instead of quitting. Make it a habit to follow through to achieve your desired results. Going back to the race, imagine at the halfway point, you dig down deep within yourself to muster all your strength, energy, and conviction. Focusing on your goal, you cross over the finish line; a feeling of elation and pride rushes over you; this is what it feels like when you see something to fruition. This year my plate will encompass many tasks and projects; but they will all have one thing in common I will work my hardest to see every undertaking through to completion. Not only will it better my opinion of myself, but I will be able to enjoy the fruits of my labor, whether it is in learning a new language, organizing my closet once and for all, or growing my income. “I’m finished!” is my new Mantra for the year!