At the heart of this issue how oil prices are reported. West Texas Intermediate (WTI) is sometimes called the benchmark crude. Years ago, most U.S. oil came from the West Texas fields and a particular grade of crude oil from
At the heart of this issue how oil prices are reported.
West Texas Intermediate (WTI) is sometimes called the benchmark crude. Years ago, most U.S. oil came from the West Texas fields and a particular grade of crude oil from those fields called West Texas Intermediate was especially sought after for refining. Since each grade of crude from each field commands a different price, instead of reporting thousands of different oil prices, we just simplified it and reported one single oil price for the whole world, and the price of WTI crude is that price.
Flash forward to now. While that last year has seen a huge decline in oil prices worldwide, that last couple of months has seen something strange happen in pricing of WTI. WTI prices are lower than inferior crude from other fields — kind of like saying Heineken beer is selling for less than Coors. What’s up with that?
The WTI price, usually reported as “world oil price” has recently been as much as $10 less than foreign oil prices. Straightforward local market forces are the result: Today, WTI is only used to make gasoline in Texas and the Midwestern U.S. Both the West Coast and East Coast gasoline is refined from foreign oil. The U.S. just doesn’t have the pipeline capacity to move Texas oil east and west anymore.
When the U.S. economy was booming, this wasn’t an issue, as there was so much demand that Texas and the Midwest had to import oil too, so WTI was fungible with foreign oil and the reported prices for WTI were representative of world oil price trends.
But today’s recession has drastically cut oil consumption to the point that WTI capacity is exceeding Texas and Midwest demand. WTI crude is piled up in Texas with nowhere to go, locally driving the price of WTI down. Meanwhile, the Brent Sea crude that makes much of the U.S. East Coast gasoline is selling for $7 more than WTI and the disparity between Brent Sea crude and WTI pricing is increasing. And the same disparity is occurring for Canadian crude oil, which is running about $10 per barrel more than WTI today.
Turns out this is just a supply and demand issue that is somewhat complex and kind of hard to see, combined with an outdated world oil price metric creating an illusion.
• Walt Barnes, a Wailua resident, is a scientist and writes a series of columns about the man-made causes of global warming for The Garden Island. He can be reached at walt@real-net.com
