NEW YORK ( TheStreet) -- No better proof of the speculatively driven oil market could possibly be seen than in the rash of refinery shutdowns and outright bankruptcies that have taken place in the last two years, the last being Tuesday's reported bankruptcy of Swiss-based Petroplus, Europe's biggest independent refiner. I've tried to make clear to people that high oil prices do not translate into big profits for refineries, a hard-to-believe truth of financially controlled oil markets. I even wrote a book about the phenomenon, Oil's Endless Bid, where I describe how crude oil markets and refined product markets trade independently. Because of that independence, the price of the crude oil input cost does not have to relate completely to the prices of end products like gasoline, heating oil and jet fuel.
And for the last decade, speculative money has skewed the prices of input crude to output gas to destroy margins and literally put major refineries out of business. Besides Petroplus, a major refinery was shut two weeks ago by Hess/Hovensa in the U.S. Virgin Islands producing up to 500,000 barrels a day. Conoco Phillips ( COP) will shutter a huge refinery in Trainer, Penn. by July and Sunoco ( SUN), once one of the great independent American refiners, is literally leaving the business, spinning off its coke production assets and shuttering its last two refineries in Marcus Hook and Philadelphia, becoming little more than a gasoline distribution network. To put the problem simply, money has continued to chase the price of the crude barrel upwards through indexes, ETF's and hedge funds, outpacing the gains of the refined products that are actually used by consumers. While the plus side of this might be cheaper gasoline over the short term, what it is actually setting up is a massive refined product shortage in the longer term. There has been a long string of bad results that have emerged from a financially-controlled oil market -- the first of course being the unnecessarily high prices of crude oil resulting from the massive investment in crude over the last 10 years. The slow bankrupting of the global refining industry is only the latest. But the inevitable shortage of refined products might be the worst we have yet experienced. Even if refining margins remain limited through much of the upcoming shortage, there will have to be a physical markets reaction which will drive gasoline prices much, much higher, perhaps as soon as this summer.
We might even be lucky to see $4 a gallon gas, if the shortage gets serious enough. Gas at $5 a gallon and even $6 a gallon could happen relatively quickly if supplies truly run short in a demand-laden driving season. If that happens, the public will surely blame the oil companies who refine crude oil, when the blame should really be shouldered by the financial industry that has turned our energy markets into little more than investment instruments. And forced much of our needed refining capacity to disappear.
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