Speaking of Oil...
In the late 1970s Tom Kloza cofounded OPIS, the Oil Price Information Service, which today has more than 50 analysts who track rack, contract and retail processes for tens of thousands of outlets across the country. He is also the publisher and chief oil analyst for OPIS and its many products and publications. But recently he is most recognized for his comments and analysis on the petroleum markets, which have appeared in virtually every major media outlet in the country, as well as his dynamic presentations within the industry.
As the country once again prepares for the beginning of the spring transition to summer-blend fuel, NACS Magazine wanted to capture Kloza's perspective on the industry and what he expects to see in the coming months — and years. And we weren't alone. Several NACS Board members also volunteered questions in areas they wanted Kloza to explore.
The business has changed in that gasoline and oil has become an investment class unto itself. There has been an absolute explosion in trading. When we started OPIS we started it under the aegis of price controls. It was pure serendipity that in February 1981 President Reagan decontrolled the last products and crude oil was not part of controls. We used to hear about the hectic pace of two price changes a month, and that gave way, of course, to several price changes a day through most of this decade.
I don't think we could have imagined that it would be up there with the S&P 500 and with the bond market or the interest rates as one of the absolute benchmarks of prosperity and world economy. I recall having a conversation with one of the original folks who put together the NYMEX and they thought it would be wonderful if they could trade 1,000 contracts a day in the futures market. And now we see 1,000 contracts trading within a few seconds.
People will do crazy things when it comes to gasoline prices. The dollars spent on fuel are different than dollars spent on everything else. It has a particular resonance with the public — and I'm glad it does because I would probably have a less successful career if it weren't for that.
Things have come full circle. Here we are about 30 years later and we're hearing that oil prices when adjusted for inflation are reaching the levels not seen since the spring of 1981. We've been on a long a journey from those oil inflation-adjusted numbers to today.
On the retail side, we get many prices through fleet credit card transactions. We supplement that with surveys and direct feeds from some of the chains and individual station owners. We've got more than 100,000 unique stations that are in the database, which goes back to 1986. It's a very dynamic database. And as a matter of fact, when people get these new onboard systems, they tend to be interested in weather, business, sports and gas prices. I can't necessarily say that this makes sense, but that is the way it is.
On a wholesale basis, we've gathered our prices in some part from companies that will treat us as a customer and send their prices to us as a customer. We've had to rely on the goodwill of petroleum retailers and distributors over the years. If you go back to 1990 or 1992, most of the major oil companies believed that wholesale prices were too sensitive to share with any third-party information gatherers and we had to go to the customers, which meant there were a lot of calls from friendly OPIS data collection people to jobbers throughout the country.
There has been a secular change in the markets where oil moves not so much based on gasoline or heating oil inventories or just typical demand. Today, it moves on the big macro economic issues. The jobs report, durable goods report — things like that. One might say it's silly for crude oil to move based on those sweeping macro issues that are more apt to impact the Dow or the S&P through the years, but crude oil is an abstraction. We trade half a billion dollars a day of crude oil on just the NYMEX. And we produce about 200,000 barrels a day. It's really moved to become a big financial abstraction that, fortunately or unfortunately, has a lot to do with the way we lead our lives.
I believe that January and February are going to see some ugly demand numbers. Demand for gasoline in January and February last year was probably inflated a bit beause you could store gasoline and sell it in the futures market some 60 or 90 days hence for much higher prices. There was a little bit of an abhorrent lift to gasoline demand and I don't think we're going to see that typical half percent or one percent increase in demand in the first part of 2008. This is a market that moves largely on sentiment and everything is either a screaming buy or a screaming sell. I wouldn't be surprised to see, as we come into that typical spring rally period, the trading community not all together that bullish about trading gasoline. That's the strange thing about 2008 in that it began with a sentiment, which is perhaps as bullish as I've ever seen in summer or fall, let alone winter. Usually when everybody is bullish it's a sign that you're not going to get some immediate increases.
I think there's going to be some pain, not so much for people who buy at the pump, but there will seem to be a little bit of a false reprieve, that this isn't the year of record gasoline prices. And when you start to hear folks saying it's safe, it won't be safe.
Right, you have to break it up into the nontraditional buyers and sellers of fuel. There's a huge speculative component, and there's also a huge investment component. Huge sums of money internationally from people of great wealth have gone into commodity funds and other funds; they believe that crude oil prices are a wonderful safe haven for money when perhaps equities and real estate don't represent a good buy. I think the genie has been let out of the bottle. People can complain about high oil prices and speculation for a long time, but what is happening to the oil market is what happened to the stock market. When I grew up, nobody I knew owned stocks. Nowadays, everybody has mutual funds where they indirectly own stocks. And to a great extent that's happened in the oil business.
On the production side for crude oil, if I had to predict where prices might be six or nine months from now I would say lower than the current $100 per barrel, despite the investment banks that are predicting otherwise. For refiners, I think that gasoline prices are really going to come under pressure at the end of 2008 and in 2009 when a lot of new production comes on domestically
and offshore.
For marketers, that's a tough one. I think that when you look at the relationship over time, sometimes prosperity is bestowed upon refiners and the reverse gets bestowed upon the retailers. If I believe that refiners are going to do less well in the second half of 2008, I think we'll see some bigger winnings for retailers.
If you look at it over the last seven years, the numbers haven't changed much in terms of the gross profits for selling gasoline at the pump. But as a percentage of the price of fuel, they're absolutely constricted to a point where they probably can't move much lower.
The diesel renaissance will persist longer for refiners than the gasoline renaissance. But I don't see any major movement by the consumer toward diesel engines. Americans are stubborn and we still have the notion that a diesel car sputters at night and doesn't make clean starts in the morning and is generally clunky.
I think diesel fuel is going to be a product in shorter supply internationally. It's the highest growth product across developing nations. For gasoline, I think this may be the last six months of the renaissance for U.S. refiners.
That's a tough one because now I have to get involved in a little bit of politics. If I were "energy czar" though, there's no way anyone can get away without emphasizing that we need to give up some excesses in our lifestyles and use fuel smarter. Not everyone needs to give up a Hummer for a Prius, but perhaps we need to use something that's a little bit more middle of the road.
There's some other disconnects there. Having teenage daughters myself, it strikes me as crazy that we know that the human brain isn't developed until you're something like 19 or 20, and we allow kids in some states to drive when they're 15 or 16. People tend to believe that we need to do something on the supply side or the demand side, when we probably really need to do both.
Nobody brings this up…but I look at the strategic petroleum reserve. I say that there is a weapon there, particularly if you believe in financial speculation running amok. It strikes me that it's a bit of a blasphemy to say we're going to have this weapon and never use it. I think there have been a lot of errors in terms of negotiations. If I were given truth serum I might say that I'd only release the oil under dire emergency, but I certainly wouldn't let the rest of the world know that I'm not inclined to use it.
Higher prices will inhibit consumer driving, but I think it probably needs to be framed differently. I think it's political suicide in this country to frame it as a "50-cent gas tax." But it's absolutely essential that we have someone in political leadership who levels with the American people and says that they need to sacrifice something. It seems as though we're willing to sacrifice many things in terms of patriotism, and it would be nice if people were asked to rein in some of their excess behavior. That doesn't mean you need to buy the 21st century equivalent of the Yugo, but it means that instead of owning an SUV for the three times a year you take your kids to a soccer match, maybe you should be driving something else.
No. Other people have said this much better than me, but there's not much difference between any of the major political candidates at this point on energy. It's disappointing no one will level with the public and say that some sacrifices need to be involved here. The difference between a surplus market for U.S. gasoline and a short market for U.S. gasoline is a percentage point of two. I have trouble believing that someone in leadership couldn't exercise that bully pulpit and just get people to be a little bit more prudent in their behavior.
When you listen to Wall Street, you will believe that everyone can get rich and world economies can grow at six or eight percent with high oil and there will be no consequence. Daniel Yergin [economic researcher and Pulitzer Prize-winning author of The Prize: The Epic Quest for Oil, Money, and Power] put out a warning in late 2007 that simply stated that there are tremendous consequences to $100 a barrel oil around the globe. I tend to agree with him, although right now if you were to ask the investment community whether you could have prosperity and survive $120 they'd probably say "yes." I think just as they were wrong about the 5,000-point NASDAQ, they're wrong about the ability of the world economies to survive with prices that, as we speak today, are about five times the level of what they were on this day in 2002.
I think the word "petronoia," which was stolen from me by George Clooney for the movie "Syriana," was one because it describes the unique form of American behavior that seems to spawn around mid-March and runs to its peak in late May.
Some that haven't worked have had repercussions. I would always describe the U.S. oil markets as "manic depressives," and some folks have taken offense to that in thinking that I'm making fun of mental health when I'm not. Also, when I talk about "just-in-time inventories" I would compare it to my "just-in-time underwear" inventory practices in college …that probably got a couple of groans. Another one is where I would describe a market that continually expands and contracts but generally gets larger and larger each year — I use Oprah Winfrey as an example. One should never underestimate the power of Oprah and her followers.
I try to be agnostic about the type of fuel and look at it from a purely economic point of view and right now ethanol makes a lot of sense because it's way cheaper at the wholesale level and ultimately at the pump. I have to confess I haven't read through the energy bill and haven't come to grips with some of the mandates that are part of that, and it would probably be a mistake to conclude that because ethanol has this wonderful price benefit right now that that's going to persist down the road. I think like most pieces of legislation we're going to find out that there are some things in there that are pretty haunting over time.
Retailers should level with their customers and perhaps share with them the receipts and the bottom line. I think the American public would be shocked to find out how marginal the margins are for people who sell fuel in this country. It's an industry that really works hard and does a good job.