Why are gas prices still high? A primer on oil commodities and currencies

There’s a pretty big difference between the price of crude oil and what we are seeing at the pump. I get questions from reporters on pretty much a daily basis, and I have to refer them elsewhere as I am not an expert on the subject. However, there are some issues here that are worth discussing, and some definitions that most people probably never see unless they are oil investors.

First off, as bad as things are in the Eurozone right now, it’s hard for me understand exactly why the dollar is still so weak. Yes, we’ve proved that we are going to pursue austerity policies when we shouldn’t, and that we aren’t terribly good at governing ourselves, and our August job numbers make me want to tear my hair out. But we’re still better than Italy and Spain, darn it!

Anyway, that weak dollar is going to affect import prices, and that has to be part of the story. However, for people who are arm’s length watchers of world oil prices, there’s a puzzle: the price of crude has generally gone down, while gas prices have stubbornly remained high.

So let’s get some definitions down.

Reference world oil markers:

WTI. WTI is West Texas Intermediary crude, and it is used as benchmark in oil pricing. It is the base commodity for The Chicago Mercantile Exhange’s oil futures. There are other crudes that investors talk about:

Dubai Crude. This is just what it says it is: it’s used as benchmark because Dubai is consistently friendly and the oil is available for sale in world markets immediately, and it’s the only oil marker from Persian Gulf sources where these factors are consistent.

The OPEC Reference Basket is exactly what it sounds like. It’s a weighted average of the prices of products from OPEC member nations. There are a bunch of factors that go into the constructed average, all of which are based on the most representative products from all the member nations: Bonny Light oil from Nigeria, for example, Kuwait Export, Iran Heavy–BCF 17 (Venezuela).

Brent Crude. Brent crude is, simply, oil from the North Sea. It’s also used as a marker, and it’s an important one because it is used out of the London Exchange.

So there is an anomaly going on right now, and it has been ongoing even before Libya started undergoing significant political change. It has to do with the price of differences between Brent and WTI crudes. WTI is trading at about $85/barrel. (Go look at these fabulous charts). Brent crude is trading, by contrast, at $112 a barrel. See Bloomberg.

The reference to Cushing refers to Cushing, Oklahoma, an oil trading hub.

So why the difference? The currency issue I think is the kicker: the pressure on US crude production probably means that Cushing is clearing as much as oil for trade as it possibly can, and thus buyers have to go to the higher price Brent crude for refining to gasoline. It’s hard to write this all into Libya because it preceded the changes there by quite a bit of time. Perhaps it is multiple causes.

That’s my best guess, folks. Otherwise, I got nuttin’.

1 Comment

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One response to “Why are gas prices still high? A primer on oil commodities and currencies

  1. Big_John

    120 vs 80 per barrel closing on the WTI.

    Current gas prices should be no higher than $3.75USD a gallon.