Gas prices expected to soar. What gives?
Which Oil Price to Watch?
Some economists and consumers are bracing for a聽, because the聽聽has shot up by $10 per barrel聽. Except that it hasn鈥檛, at least not if we鈥檙e talking about the global price of crude oil that鈥檚 factored into the price of the petroleum products sold in much of the US, especially along the coasts.
The global oil market, reflected in the price of聽, is only up about聽聽this month, mainly due to the situation in Egypt. A big part of the jump in domestic oil prices reflects the closing of a historically anomalous gap as US oil moves back into line with the rest of the world.
Such an increase in oil prices does not automatically herald a rise in gasoline prices, especially if it mainly erases a discount that benefited refiners in one region of the country. Moreover, gasoline and crude oil as聽commodities move in separate markets, linked but not in lock-step.聽 Over the medium-to-longer term聽they聽must clearly be聽connected, but in the short term each responds to distinct forces of supply, demand, inventories and expectations.聽
After Widening for Two Years, A Crucial Gap Closes
Starting in 2011, West Texas Intermediate (WTI) crude, the main US oil benchmark, traded at an聽聽to Brent, a North Sea grade that was Europe鈥檚 main oil benchmark, and more recently the world鈥檚. For decades, these two聽crudes had traded near parity, plus or minus a buck or two a barrel. Several factors changed that. The biggest was the rapid growth of production from unconventional sources in the middle third of North America: shale oil and upgraded oil sands crude.聽From West and South聽听迟辞听聽and Alberta, Canada a wave of new oil overwhelmed existing pipeline capacity, some of which was pointed in the opposite direction to carry imported crude into the mid-continent.
罢丑别听别苍辞谤尘辞耻蝉听聽at Cushing, OK began to fill up.聽 That鈥檚 a crucial part of the story, because聽Cushing is the principal settlement point of the WTI futures contract. The more crude聽that arrived at聽Cushing without being needed farther north or provided an exit to the south, the聽聽and the more depressed the WTI price became, relative to Brent. Nothing like that lasts forever in a highly competitive industry. At a $20/bbl discount, companies pursued every possible avenue for getting oil from Cushing to the Gulf, including building new pipelines and reversing existing ones, while using rail and even trucks in the interim. This amazing episode is nearing its end, and traders are聽聽as an opportunity for profit.
The End of the Bottleneck Benefit for Some
What does that mean for gasoline prices?聽 If you live on or near one of the three coasts, probably not much by itself. Consider gas prices in my home state of Virginia. Like most of the East Coast south of Delaware, the majority of our fuel is supplied by pipeline from refineries in the Gulf Coast. According to the Energy Information Administration鈥檚 (EIA) latest survey of retail prices, unleaded regular gasoline聽聽sold for an average of $3.37/gal. last week. (My local prices are about 20垄 higher than that.)
If we subtract the聽聽totaling $0.375/gal., and another $0.20/gal for a typical retailer鈥檚 margin, that gets us a wholesale price of $2.82/gal. Now subtract the聽听蹿谤辞尘 Houston to Fairfax, VA of $0.033/gal., leaving $2.78/gal. or $117 per barrel at the Houston-area refinery gate. Even after allowing for refinery profit margin, that suggests that product prices in the central- and lower-Atlantic states were already reflecting global oil prices, rather than deeply discounted prices for domestic crude that couldn鈥檛 find an outlet past Cushing.聽 The West Coast was even less affected by cheap WTI.
On the surface, the return of a more normal WTI/Brent relationship poses聽more risk of higher prices for consumers in states where refiners have enjoyed a couple of years of less expensive crude, relative to the rest of the country. Yet EIA鈥檚 data shows that average聽gasoline prices from 2011-12 weren鈥檛 much cheaper in the聽, compared to the聽, than they were in 2007-10, before the crude spread widened. Cities聽like Tusla, OK might have enjoyed some nifty local discounts for a while, but the main beneficiaries of the crude oil bottleneck in the mid-continent seem to have been companies like聽聽that were in the聽聽at the right time with refineries that聽听尘耻肠丑听聽than聽under more typical circumstances.
Conclusion: If You鈥檙e Worried About Gas Prices, Focus on Gasoline鈥檚 Fundamentals
Overall, in the absence of a larger shift in聽global聽oil prices,聽the prospect of聽聽in the weeks ahead has more do with seasonal factors such as聽听蹿谤辞尘 summer driving, and a US economy that has聽proved more聽resilient, recently, than other parts of the globe. The unwinding of an unusual gap between domestic and imported crude oil prices likely has bigger implications for domestic producers and refiners than for consumers.
厂辞耻谤肠别:听
