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Crude Oil Is Getting Cheaper- So Why Isn’t Gas?

Crude oil price has been plummeting to new lows this year but, strangely, gas prices do not go down with it. For instance, crude oil once closed below $34/barrel, the lowest for 2009 then but the national average gas price rose to $1. 95/gallon on that same day, then 2009’s highest. Sounding more like a conspiracy to irate drivers, it has actually more to do with the irregularities of a suffering energy market. West Texas Intermediate, set at the New York Mercantile Exchange, is the benchmark for crude oil prices. West Texas crude has historically cost more but the economic downturn has reversed the trend.

The dramatic demand decrease for West Texas crude left storage facilities with unwanted inventory and sent its prices sinking to levels even lower than the prices of inferior crude from other countries. Foreign oil from South America, Saudi Arabia, and the North Sea sells for up to $10/barrel more than their West Texas counterpart, exclusive of shipping costs. Brent North Sea crude, which supplies East Coast refineries for distribution to gas pumps all over America, currently costs $7/barrel more than the West Texas crude.

The trend is expected to continue. Gas price and crude oil price are indeed related. However, most of the US-produced gas is from overseas crude which explains why pump prices are high and still predicted to increase regardless of the crude benchmark trend. Tom Kloza, chief oil analyst at the Oil Price Information Service, foresees gas prices going beyond $2 and hitting $2. 50 before spring. The reason for America’s use of foreign crude is that the West Texas International crude has historically cost more.

Therefore, only those proximate refineries in the Midwest, some Texas parts, and a number of other refineries built the necessary pipelines for supply. Other refiners do not have access to the suddenly-inexpensive premium oil. For instance, San Antonio-based Tesoro, which has six refineries on the West Coast and Hawaii, uses locally-drilled and Canadian oil costing $10/barrel more for its Utah and North Dakota refineries. It doesn’t have the necessary pipelines for access to the cheap premium crude. Constructing more pipelines, however, is also a non-option for refiners.

Reason is, billions of dollars have to be invested for several years when oil prices are also unpredictable. Indeed, nobody can tell how long West Texas crude will be cheaper than foreign-sourced oil. Beyond the pipeline-lack issue, refiners are also reducing production because of the pessimistic air brought about by job cuts and consumer spending concerns in the news. The production cuts are a corporate measure aimed at avoiding possible losses on unconsumed gasoline. The same production cuts, however, push gas prices further.

Oil consumers refuse to be pacified by the economic roots of the divergent West Texas crude and gas prices phenomenon. It is definitely hard to believe that when Exxon Mobil Corp. had billions in profits in 2008 when oil prices hovered near $150. Others also see conspiracy in the fact that gas prices were really low during the election season only to gain momentum again recently. Kahn, C. , & Porretto, J. (February 15, 2009). Crude oil is getting cheaper- so why isn’t gas?. Retrieved February 17, 2009, from http://news. yahoo. com/s/ap/gas_prices_unhinged

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