Last week, crude oil closed down to under $34 per barrel while the national average price for a gallon of gas rose to $1.95. Most people would assume that since crude oil prices are going down that we would see fuel costs fall as well. However, this assumption is ultimately incorrect. Most consumers understand there is a correlation between fuel prices and oil, but what they fail to understand is which oil actually affects fuel prices.
The crude oil figures that U.S. consumers see on television and in the paper are driven by the price of West Texas Intermediate (WTI). At this time, WTI’s premium crude is selling at a lower price point than lower grade foreign crude. Our economic downturn has resulted in a lower demand for premium crude. With the reduced demand, the WTI storage facilities are now filled to capacity. The excess amount of premium grade crude is what has caused the WTI prices to fall to five-year lows.
Overseas crude is what actually goes into our vehicles. Currently, foreign oil has a base cost of $10 per barrel. When you add in the cost for shipping the oil, the price goes up dramatically. Crude from Brent North Sea, which is sent to several main East Coast refineries, closed about $7 above WTI crude yesterday at $41.03. Analysts at Deutsche Bank indicate that this trend will continue.
Tom Kloza, a publisher and chief oil analyst with the Oil Price Information Service recently stated, “We’re going definitely over $2, and I bet we’ll hit $2.50 before spring.”
Some might wonder why U.S. consumers can’t use the premium crude that’s being held by WTI in their storage facilities. It’s basic logistics. There are no pipelines to get the premium crude from Texas to the main refiners. A Senior VP at Tesoro, which has half a dozen refiners along the West Coast and Hawaii, concurred that the WTI premium oil is comparatively inexpensive at this time but “you can’t just build a pipeline to everywhere. We know we can’t get it.”
Additionally, no one knows how long the premium crude prices will remain lower than foreign crude. It takes years and an investment of billions of dollars to create a pipeline. But this understanding of crude oil doesn’t do much for consumers at the pump. All they see is prices continuing to climb back up.
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