Monday, February 16, 2009

What we are not told about oil prices

Gasoline prices keep going up and the price of oil goes down. Obviously this is a sign that big oil companies are gouging us. Ask any Democrat politician, ask President Obama, read any newspaper, watch CNN, NBC, ABC, CBS and MSNBC, they will all say the same thing. In fact, ask your neighbor, he will also tell you the oil companies are fixing oil prices and gouging the public. Why not, no one explains oil prices so what else is one to believe?

Oil prices recently have been generally in the range of $34 to $40 a barrel, as reported by the press and on television. Gasoline prices have risen about $.60 to $.70 a gallon as the reported price of oil has dropped. Just this week the price of oil closed under $34 a barrel and the national average price of gasoline rose to $1.95 (I paid $2.19 in California). But is this the whole explanation? Not really.

It’s true that the price of gasoline is tied to the price of oil; but it’s a matter of which oil price.

For reasons known only to the insiders, the so-called “benchmark” price of crude oil is “West Texas Intermediate” which is the price set at the New York Mercantile Exchange and which is quoted throughout the media.

Usually West Texas crude, a high grade of oil, sells for a higher price than inferior grades of oil produced in the Mid East and other places around the world. But it is oil coming from overseas that is used to make most of gasoline in the United States. So prices at the pump actually reflect the overseas oil price, not the “benchmark” West Texas sweet crude oil. Foreign oil is selling for $10 to $20 higher at the well head than the lower benchmark price (West Texas crude oil) and that does not include the added cost of transportation to U.S. refineries. [As an aside, the converse is also true. When the benchmark oil price was $147 a barrel, Iraq oil sold for $87 a barrel under contract pricing.]

Current domestic economic conditions have significantly reduced the demand for the West Texas crude oil and inventories are increasing; therefore, the supply exceeds the demand and prices fall and this is reflected in the decreasing benchmark price. It is unfortunate but because the price of the higher quality West Texas oil is usually higher than inferior imported oil, there are no pipelines to refineries outside of Texas. So even though this domestic oil is priced lower at present, refineries outside of Texas don’t have access to it. The result is that although it may appear that the price of oil has dropped a lot if you just look at the published benchmark price of oil actually the cost of oil used to produce gasoline for most of the country has not dropped to benchmark prices.

Another factor of costs is that reduced demand because of the economic slow down has resulted in decreased gasoline production by producers (Texas oil excluded) to minimize overproduction. So when the demand increases even slightly there is a greater demand than supply and the gasoline price goes up, as it is now.

It’s interesting how much is not told to the public. Perhaps that’s because the news media only wants to make people think the worst of business to make private enterprise not look so good; that way government can be looked to for all solutions and people will more readily accept the socialist paradigm.

1 comment:

happy said...

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