Thursday, September 11, 2008

More Signs of Oil Market Rationality

A story on Bloomberg reports that oil prices are down while gas prices are up -- "a strange situation where the products are higher and crude is lower.''

No, not strange at all. What was strange were all the times when refineries were being shut down for weather-related reasons and crude prices were bid up.

More elaborate models are useful, but the basic idea is that if refining capacity is cut, the demand for crude falls. Refined product prices increase, input prices decline, and refinery profits increase.

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