Sunday, February 15, 2009

If price of crude oil is dropping, why is cost of gas rising?

That’s the headline of a piece in today’s Houston Chronicle. I take the Chronicle seriously on this subject because, after all, Houston remains the hub of the oil industry.

They should know what they are talking about.

Well, actually, the Chronicle was running a piece written by two AP reporters, Chris Kahn and John Porretto.

So I was wondering just the same thing the other day as I was putting gasoline in my rice burner, and paying $1.78.9 for the honor. Saving a whole 2 cents per gallon by choosing a non-major gas station.

So I looked at the article, hoping to have some answers. Here is what they said:

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.

Well that makes sense. Oil is down but the oil price we track, West Texas Intermediate, or WTI, is abnormally lower than lesser quality crudes that are more likely to be turned in to gasoline.

Wait, that doesn’t make any sense at all.

Isn’t the market all about supply and demand as everyone keeps telling me? Shouldn’t a high quality crude like WTI be more likely to be turned into gasoline because it will give higher yields than heavier oil?

And in this, I was perfectly right. They go on to explain:

“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 (sic) 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.”

Now that’s just crazy.

That’s not what Republicans are telling me. The Republicans are telling me that the we don’t have enough oil and have to import oil from Muslim fanatics because Democrats won’t let the oil companies drill in ANWR or offshore the pristine beaches of northern California.

Drill, baby, drill.

But now I’m being told that not only do we not choose to pipe WTI to distant oil refineries because it’s usually too expensive and we can get cheaper oil there instead, but also that we use the price of WTI as a benchmark price for oil produced in the United States.

Now that’s just crazy.

So I learned a couple of things today. I learned about a dirty little secret about domestic oil production that isn’t being widely shared. And I learned that when we want to know the price of oil is, we ask what is the price of the most expensive oil that most people don’t use.

So I got more curious, and wanted to know what the price of oil is in other parts of the world. What, for instance, is the price of North Sea Brent? What about Arabian Light? These crudes, they tell me, are being turned into gasoline and sold here at the pump.

And after several tries in a Google search I finally happened on the right keyword combination that found this site.

Where I did see that WTI (aka United States) is definitely about $2.30 per barrel below the world average, just like the AP article said. I also saw that the price of oil is not down.

It’s up.

OK, not up to what it was when we were paying $4.00 for a gallon of gas, but since the beginning of the year, on average, the price of oil has risen by $7.20 per barrel.

That’s a 21% increase in price.

So gasoline is up because the price of crude oil is up. Nothing new under the sun.

Now I have a new question. If gasoline is up because crude is up, why did those two AP reporters jump through so many hoops and negotiate so many tortuous curves to explain the supposedly unexplainable?

1 comment:

Bob said...

Thanks for dissecting this one, Hal. When I try to really understand the oil markets I always end up feeling like the kid who who they won't let into the tree house because he doesn't know the secret handshake.