The amount of money a U.S. refiner can make producing gasoline in the United States has improved in recent weeks relative to diesel thanks to gasoline production cuts and a heavy downturn in diesel demand from the U.S. trucking industry as the economic crisis deepens. Diesel has been the most profitable fuel a producer can make since July 2007 -- an unusual occurrence for the less difficult-to-make fuel largely tied to high freight activity and demand from the under resourced global electricity sector.

The early evidence of a reversal in the profitability relationship is already having an impact on what consumers are paying at the pumps: diesel's price premium to gasoline has dropped from 64 cents a gallon to 43 cents a gallon over the past four weeks, according to auto and travel group AAA.

In the above graph, the top line indicates the gross profit margin a U.S. refiner can achieve producing a barrel of distillate fuel, while the  bottom line indicates the margin for producing gasoline.

A U.S. government report on Monday showed U.S. drivers cut the number of miles they traveled by 3.7 percent -- the biggest drop for the normally travel-heavy month on record.

Signs of weakenening energy demand in the United States and Europe have been credited with a $23 decline in oil prices since mid-July.

The price of diesel has shot up nearly 50 percent since a year ago to $4.27 a gallon, touching off a rash of minor protests by U.S. long-haul truckers in recent weeks.

By comparison, gasoline prices have risen only about 21 percent since a year ago to a relatively modest price of $3.67 a gallon on average, according to the daily price survey from the AAA.

The price of both key fuels has been tracking the soaring cost of crude -- which is up sixfold since 2002 because of increasing demand from China and other developing countries.

But why would diesel rise so much faster than gasoline?

One theory is that worsening electricity supply problems in countries like China, South Africa, Chile, Argentina, and parts of the Middle East has increased demand for middle distillates like diesel for use in temporary power generators.

Whatever the cause, the increase in world demand for diesel has boosted U.S. fuel exports to their highest since 1991 and helped push U.S. distillate supplies to 3 percent below a year ago, according to the most recent data from the U.S. Energy Information Administration.

U.S. gasoline supplies, meanwhile, are running at a surplus.

Exxon, which was pushed out of a huge Venezuelan heavy oil project last year as part of a nationalization drive, has taken the country to court in an effort to secure compensation, winning orders freezing $12 billion in Venezuela's assets around the world. 

In response, Venezuela has railed against Exxon's legal "terrorism" and has stopped oil sales to the company. Venezuelan President Hugo Chavez, who has accused the Bush administration of backing a failed coup to overthrow him, has also said Exxon's courtroom assault is part of a plan orchestrated by the Bush administration to oust him.

Big scary moves that could further cool the already frigid relationship between Washington and Caracas, which have steadily declined since Chavez first won office in 1998 despite the two nations' close economic ties.

But for the moment, there doesn't seem to be much real impact on the availability of oil to the market. While oil prices have rallied on the rising tensions, analysts say the effect of the fight on U.S. oil supplies and on the operations of Exxon Mobil or Venezuela's state energy company appear almost nil.

"Venezuela doesn't want to halt sales because Chavez needs the revenue," said Eric Wittenauer, analyst at AG Edwards.

"It looks like Exxon Mobil can pretty much buy from others the same oil Venezuela is denying it," said Mark Waggoner, president of Excel Futures.

After skyrocketing to the all-time peak earlier this month, oil prices have dropped 10 percent to a slightly more managable $90 a barrel -- and the world's energy brainiacs are a bit conflicted over whether this multi-year rally is over.

 Why? To borrow from James Carville, it's the economy, stupid.

A housing crisis and a credit crunch (not to mention the high price of gasoline at the pump) are showing signs of dragging down U.S. growth. Some economists are predicting a recession. Such a slowdown in the world's biggest energy consumer has the potential to slow fuel consumption, analysts say -- crimping trucking, travel, and manufacturing -- and could also threaten the runaway growth in energy demand from developing nations like China. Meanwhile, auto companies are busy designing smaller, more efficient cars in a rush to fuel economy not seen since the 70s.

On the other side of the coin -- and there always is one --  OPEC appears to like strong oil prices. The cartel, which shrugged off calls for an output hike in December when oil first flirted with the triple digits, has been equally cool to Bush's request this week for more supply, signaling a continued tight-fisted policy.  Add to that the weak U.S. dollar and foreign government fuel subsidies that experts say could insulate non-U.S. energy consumption despite a U.S. slowdown, plus instability in big oil producer nations, and you've got the ingredients for continued high oil prices. 

Guess we'll have to wait and see.

The move comes in a year oil prices struck an all-time high near $100 a barrel amid concern that demand is rising more quickly than supply.

Oil prices

The decline in crude prices may eventually filter down to consumers in the form of cheaper gasoline and heating oil. But it could also lead oil cartel OPEC to decide against a widely-requested increase to crude output when it meets in Abu Dhabi on Dec. 5. 

With oil prices flirting with the $100-a-barrel mark, analysts are wondering how much the U.S. consumer can bear.  

A Reuters/Zogby poll released Wednesday shed some light on the question, showing that more than three-quarters of Americans will cut fuel use or slash spending on retail and entertainment if their energy bills keep on rising.

Do you think $100 crude will force Americans to conserve?

U.S. crude oil prices gushed to a record over $94.50 a barrel

Energy analysts are saying the industry is selling off huge amounts of oil in storage because of the shape of the forward price curve -- oil prices get cheaper for delivery out into the future -- and the market may now be in a vicious circle.... or perhaps a hampster wheel.

"We're in a hampster wheel right now," said Stephen Schork, editor of the Schork Report. "Given the economics of what it takes to store oil, it makes no sense to hold onto inventory right now. Storage owners are taking the economically prudent step and dumping inventories because of the backwardated market structure."

He explained that having a storage tank full of crude that loses value over time makes it a wise choice for energy players to sell onto the physical market now, rather than later.

"If you were managing storage for an oil company you could be sued for malpractice for adding to storage last week. This can only end when there is not enough prompt demand to sop up supply on the spot market. Only then can we switch back into a contango structure which would be conducive to building up storage levels," he said.

NOTE: This post was edited to change the accompanying photo.