Processing Magazine

Crude oil is getting cheaper -- so why isn''t gas?

February 16, 2009
Crude oil prices have fallen to new lows for this year. So you''d think gas prices would sink right along with them. Not so. The Associated Press reports that, for example, crude oil closed just under $34 a barrel, its lowest point for 2009. But the national average price of a gallon of gas rose to $1.95 on the same day, its peak for the year. The very next day gas went a penny higher. To drivers it sounds like a conspiracy. But it has more to do with an energy market turned upside-down that has left gas cut off from its usual economic moorings. The price of gas is indeed tied to oil. It''s just a matter of which oil. The benchmark for crude oil prices is West Texas Intermediate crude oil. The price is used at the New York Mercantile Exchange each day. Right now, in an unusual market trend, West Texas crude is selling for much less than inferior grades of crude from other places around the world. A severe economic downturn has left U.S. storage facilities brimming with it, sending prices for the premium crude to five-year lows. But it is the overseas crude that goes into most of the gas made in the United States. So prices at the pump will probably keep going up no matter what happens to the benchmark price of crude oil. The recession in America has dramatically cut demand for crude oil, and inventories are piling up. So prices for West Texas crude have fallen well below what oil costs from places like the North Sea, Saudi Arabia and South America. Historically, West Texas International crude has cost more. So nobody bothered building the necessary pipelines to carry it beyond the nearby refineries in the Midwest, parts of Texas and a handful of other places. Now that the premium oil is suddenly very inexpensive, refiners elsewhere can''t get their hands on it. So why not build more pipelines? Because investing billions of dollars over several years makes no sense when the prices could just flip a year from now to where they were before. At the same time, refiners have seen the same headlines as everyone else about job losses and consumer spending. They''ve slashed production just to avoid taking losses on gasoline no one will buy. Result: Higher gas prices.