Oct. 15, 2012
-- A recent upsurge in domestic oil production is driving down U.S. benchmark crude prices, and delivering a premium to some refiners and their investors. However, this boom is having little impact on consumer prices being paid at the pump. U.S. crude oil production is expected to rise 12% this year, and an additional 8% in 2013, when it will hit its highest domestic production level since 1993 – based on government speculation. The price of West Texas crude – the U.S. benchmark – has fallen 7% this year, maintained by rising supplies extracted with new drilling methods. Nonetheless, gasoline prices average around $4 per gallon nationwide. Increased U.S. crude production may seem like a legitimate remedy, but is proving wholly ineffective based on the global oil and gas economy. The world’s appetite for energy, on the whole, remains voracious, and Middle Eastern tensions serve us a reminder that the oil and gas industry is highly tumultuous and can be easily disrupted.
This means that while production costs may be down, producers are still able to charge market prices based on the global economy for their highly sought-after gasoline and diesel. Midwestern-based oil producers and refiners have experienced income jumps as large as 149%. "Rising North American crude production should lead to increased stability in the refining industry, which we believe will result in a more secure supply and steady price for the U.S. consumer," Julia Heidenreich, a HollyFrontier spokeswoman, said in a statement. She added, "Given our access to cheaper crude oil in the geographies where we operate, HollyFrontier should enjoy structurally higher margins going forward." HollyFrontier operates refineries in Oklahoma, Kansas, and other several other Midwestern states.
Benchmark U.S. crude is based on prices at the Cushing, Okla., storage hub, and is known as West Texas Intermediate, or WTI. That price is now nearly $23 cheaper than Brent crude, the European benchmark. The gap has more than doubled from $8.55 at year-end, surprising many analysts and investors who expected it to be narrower. Before 2011, the gap was typically within a dollar or two. A large contributing factor to the persistently high oil costs for consumers is that the oil being pumped at new locations across the Midwest is produced at largely landlocked refineries. Gasoline prices in the Midwest would most likely benefit from declines in the price of WTI. But gas prices there haven't fallen relative to the rest of the country, according to a June study authored by the Energy Institute. The reason is that Midwest refineries are operating at near full capacity and selling everything they can produce, but that still isn't enough to satisfy demand from drivers. As a result, the region imports at least some gasoline, paying higher international prices, according to economists. That keeps the price of all gasoline high, in a cyclical process of buying, refining, and selling. "They're going to have to pay what basically everybody else is paying," said Michael Plante, a research economist at the Federal Reserve Bank of Dallas.
For consumers to experience even somewhat lower oil prices, Brent crude would need to fall significantly. Some investors and analysts predict that the gap between West Texas and Brent crude prices will narrow as supply disruptions ease and the U.S. bottleneck is gradually alleviated. Nonetheless, most analysts do not expect the difference to disappear soon.