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.

www.PITHOCRATES.com

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