Why Crude Oil Prices May Not Affect Pump Prices
Since Oct. 4, the price of West Texas Intermediate (WTI) crude oil is up 33%, but the news media has barely given this story a second look. If the price of oil is up that much, presumably the price of gas should be crippling the wallets of consumers. So why haven't we noticed? (For related reading, see Understanding Oil Industry Terminology.) The reason is because the wholesale price of gasoline on Oct. 4 was $2.61 and two months later on Dec. 2 the average wholesale price had only risen 1 cent to $2.62. We've all learned that when oil rises in price so does the price of gas. So why not this time?
TUTORIAL: Crude Oil
The Tale of Two Oils
There are actually 161 different types of oils traded according to the International Crude Oil Market Handbook, but if you ask an oil investor they will tell you about WTI and Brent Blend crude oil. WTI oil is refined in the Midwest and Gulf Coast area and is the traditional source of the majority of the oil used in the United States. If you want a high quality oil, you want it to be sweet and light and that comes from a low sulfur content and low specific gravity. WTI is lighter and sweeter than Brent Blend crude which makes it higher quality and more expensive in normal market conditions. WTI is the oil that is traded at the New York Mercantile Exchange (NYMEX) making it the traditional benchmark for oil traders around the world. (To learn more, read How Does Crude Oil Affect Gas Prices?)
Brent Blend crude is a more sour oil because of its higher sulfur content. It is actually a mixture of multiple types of oil that come from the North Sea, and when oil markets are acting in a way that is considered normal, Brent Blend crude is largely used in Europe. It doesn't take much to knock the oil market out of balance. Because of changes in the North American oil landscape, European companies are finding it more profitable to export their oil to the United States.
That North American change is a shift in the way oil moves. In the past, oil has moved north from the Gulf Coast, but the recent discoveries in Northern states as well as Canada have sent oil moving south. Cushing, Okla. is where WTI is housed and priced. Because of these new flows, the Wall Street Journal recently called Cushing the "Roach Motel" of oil. Oil can get in but it can't get out. This, along with other geopolitical issues has caused a change in the oil markets; this is a change that is good for the consumer, at least for now.
We Love Brent!
Because of the problems with WTI oil, Brent Blend crude has become the benchmark for gas prices, at least for now. While WTI has seen a 33% increase since Oct. 4, Brent Blend crude has seen a modest 7% increase and because gasoline prices are not strictly correlated to oil prices, this has caused the consumer to see an average price at the pump of $3.29 as of Dec. 2.
The Bottom Line
The oil market is a volatile market. Wars, weather events and broken pipelines are just a few of the many factors that could make what we pay at the pump see a steep increase virtually overnight but for now, consumers are the beneficiaries of this recent changing of the guard in the oil market. (For related reading, see What Determines Gas Prices?)