High Gasoline Prices blamed on Wall Street instead of Where it Belongs – Environmentalism

Posted by PITHOCRATES - April 15th, 2012

Week in Review

Is Wall Street to blame for high gasoline prices?  Or are governmental environmental policies.  Most like to blame Wall Street.  Because they have no understanding of the oil business.  Even though it’s pretty straight forward.  And follows all the rules of supply and demand.  Where most of the current price pressures are coming on the supply side of the equation.  But Wall Street isn’t to blame for that.  We are.  For our collective attacks on the oil industry.  And our acquiescence of the environmental movement (see If the U.S. is now an oil exporter, why $4 gas? by Leah McGrath Goodman posted 4/11/2012 CNNMoney).

The U.S. is now selling more petroleum products than it is buying for the first time in more than six decades. Yet Americans are paying around $4 or more for a gallon of gas, even as demand slumps to historic lows. What gives..?

Americans have been told for years that if only we drilled more oil, we would see a drop in gasoline prices. (Speaking to voters last month, Newt Gingrich made the curious assurance that more oil drilling could drive down gasoline prices to $2.50 a gallon, prompting the White House to accuse him of “lying.”)

But more drilling is happening now, and prices are still going up. That’s because Wall Street has changed the formula for pricing gasoline.

Until this time last year, gas prices hinged on the price of U.S. crude oil, set daily in a small town in Cushing, Oklahoma – the largest oil-storage hub in the country. Today, gasoline prices instead track the price of a type of oil found in the North Sea called Brent crude. And Brent crude, it so happens, trades at a premium to U.S. oil by around $20 a barrel.

So, even as we drill for more oil in the U.S., the price benchmark has dodged the markdown bullet by taking cues from the more expensive oil. As always, we must compete with the rest of the world for petroleum – including our own…

To put it more literally, if a Wall Street trader or a major oil company can get a higher price for oil from an overseas buyer, rather than an American one, the overseas buyer wins. Just because an oil company drills inside U.S. borders doesn’t mean it has to sell to a U.S. buyer. There is patriotism and then there is profit motive. This is why Americans should carefully consider the sacrifice of wildlife preservation areas before designating them for oil drilling. The harsh reality is that we may never see a drop of oil that comes from some of our most precious lands.

It’s not Wall Street.  It’s the crude oil.  The refineries.  And the fact some refineries can only refine the Brent sweet crude oil.

The stuff we import, Brent sweet crude, is a higher quality crude.  It’s cleaner.  And easier to refine.  But it’s more expensive.  Which is a problem for the refineries on the east coast.  And on the Gulf Coast.  Because that’s the crude they can refine.  Because their crude costs are higher their refined gasoline costs are higher.  Therefore, these refineries lose money when selling at the prevailing market price.  So they export their gasoline where they can sell it at a higher price that covers their costs.  Or they shut down refineries.  Which they have done.  Shutting done some 5% of refinery capacity within the last 6 months.  Bringing total online capacity to about 60%.

The stuff we get from Canada, North Dakota and the Gulf of Mexico is West Texas Intermediate.  Which is a heavier, dirtier crude oil.  The refineries that can refine this oil are located in Oklahoma, Kansas and outside Chicago.  And because the gasoline they sell starts with a crude oil priced about $20 less a barrel than their east and Gulf Coast rivals they can sell at prevailing market prices and make a profit that recovers all of their costs.  Which is why these refineries are operating at about 95% of capacity.  Which explains why gasoline is cheaper in Midwest than on the coasts.  Well that, and California’s own emission standards that require an even more costly blend of gasoline than your typical summer blend (to reduce the polluting affects of gasoline at higher temperatures).

(You can read more about refining costs in a February Bloomberg article.  And more about gasoline blends in an Energy Policy Research Foundation article.)

So, no, it’s not Wall Street causing the high gas prices.  It’s environmental policy.  Which requires costly blends of gasoline to reduce emissions.  And makes any expansion of the refinery infrastructure cost prohibitive.  Environmental impact studies alone can take years to complete.  And cost hundreds of millions of dollars.  So the aging infrastructure strains at the seams.  Whereas if those policies weren’t so cost prohibitive we could build new refineries along the east and Gulf Coast to replace those underutilized and shuttered facilities.  And flood them with domestically produced West Texas Intermediate.  Which would make gas prices fall.  At least it would lower the east and Gulf Coast prices to that enjoyed in the Midwest.  But not in California.  Who will forever have the highest gasoline prices thanks to their emission standards

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There’s a Direct Link between the Type of Crude refined and the Price at the Pump

Posted by PITHOCRATES - February 26th, 2012

Week in Review

Oil is not oil.  There is Brent sweet crude.  And West Texas Intermediate (WTI).  We import the Brent.  While a lot of the WTI comes from wells closer to home.  The U.S.  Canada.  The Gulf of Mexico.  And there is a correlation between gas prices and the type of crude (see Angry About High Gas Prices? Blame Shuttered Oil Refineries by Matthew Philips posted 5/24/2012 on Yahoo! Finance).

The U.S. refining industry is being split in two. On one hand are the older refineries, mostly on the East and Gulf Coasts, that are set up to handle only the higher quality Brent “sweet” crude—the stuff that comes from the Middle East and the North Sea. Brent is easier to refine, though it’s gotten considerably more expensive recently. (Certainly another reason for higher gas prices.)

Then there are the plants able to refine the heavier, dirtier West Texas Intermediate (WTI)—the stuff that comes from Canadian tar sands, the deep water of the Gulf of Mexico, and the newer outposts in North Dakota, which just passed Ecuador in oil production. These refineries tend to be clustered in the Midwest—places such as Oklahoma, Kansas, and outside Chicago. While the price of Brent crude has closed at over $120 a barrel in recent days, WTI is trading at closer to $106. That simple differential is the reason older refineries that can handle only Brent are hemorrhaging cash and shutting down, while refineries that can handle WTI are flourishing.

“The U.S. refining industry is undergoing a huge, regional transformation,” says Ben Brockwell, a director at Oil Price Information Services. “If you look at refinery utilization rates in the Midwest and Great Lakes areas, they’re running at close to 95 percent capacity, and on the East Coast it’s more like 60 percent,” he says.

How about that?  Economic reasons for the high price of gasoline.  The cost of Brent sweet crude makes it impossible to sell in America at a profit.  So the refineries are selling it overseas at prices that can keep them from operating at a loss.  Or they’re shutting down refineries.  To reduce the surplus of gas they can’t sell at a profit.  Making the gas stations supplied by these refineries sell at record high gas prices.  Whereas those stations supplied by the WTI refineries are able to sell gas at more affordable prices.

The lesson here?  The amount of oil brought to market matters.  The more the oil supplied the lower the price.  And the lower the price of gasoline made from that oil.  There’s not much we can do about the price of Brent sweet but there is something we can do about WTI.  Drill more.  Build more refinery capacity for it.  And build more pipelines to move that precious cargo all over the United States.  Creating lots and lots of jobs.  And letting people enjoy hitting the highway again in cars they like that may also happen to be gas guzzlers.  Which will also reduce the price at the pump.  Because demand for gasoline will rise to sustain this economic buildup.  Allowing prices to fall due to economies of scale.

And it’s all there for the taking.  All we have to do is to take this future.  Instead of the one we’re working on now where driving has become a four-letter word.

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