Why are Gas Prices Remaining High as Crude Oil Keeps Dropping?

By Jacob Brown | June 14, 2012
We're not seeing too much relief at the gas pumps this summer, but that has nothing to do with the cost of oil this year. Oil is currently trading at prices around $83 a barrel, an 11-month low. Yet, a gallon of regular gas is still $3.53 on average, according to AAA. In 2008 when oil hit its peak of roughly $150 per barrel, gas prices reached modestly higher by comparison, $4.11 per gallon on average. It serves to reason that gas prices are tied to the price of a barrel of oil but don't directly correlate with them. So what gives? How are we not paying significantly less for gas than we are? While strife in the Middle East, the OPEC cartel of oil-producing countries, and expanding world demand for oil certainly have an effect on oil prices, they're not the big factors keeping prices up. Oil-producers in the U.S. are. Valero, Tesoro, Marathon Petroleum, and HollyFrontier comprise the biggest oil-producers in the U.S. But instead of keeping oil refined in the U.S. for domestic use, they traded it abroad. Why? Money, of course. Oil trades on two commodities scales, West Texas Intermediary and Brent Crude. The U.S. uses the WTI scale, but the rest of the world uses Brent. While oil prices hover around $83 per barrel on the WTI market, they're $97 on the Brent Crude market. So why wouldn't an oil producer want to trade its commodities in a market where it can make more money? As much of the developing world thirsts for oil on an ever-increasing level while we ween ourselves from it, it makes sense for U.S.-based companies to draw profits overseas. Last year, for the first time since 1949, U.S. refineries exported more oil than our country imported from the Middle East and other oil-rich nations. Oil consumption in the U.S. was down last year by 10 percent to 18.84 million barrels per day on average. And a boom began taking a stronger foothold in the U.S., as hydraulic fracturing—or fracking—allowed a greater production of domestic natural gas. "In 1990, North American reserves and production were falling, but thanks to conventional [means], proved reserves have risen have risen 68 percent since then," ConocoPhillips CEO Ran Lance told OPEC ministers earlier this week. "North America could become self-sufficient in oil as well (as gas) by 2025," he said at an earlier conference. While OPEC nations have said they're largely unconcerned by their biggest customer jilting them for in-house resources, the U.S. has ramped up its alternative fuel prospects. Fracking has allowed it, and other countries who've traditionally relied on OPEC like Russia, to keep oil prices stable, if not declining. But does that mean those lower prices will translate into a smaller penalties at the pump? To a degree, yes. But as long as it's more lucrative to sell our domestic oil abroad, we're unlikely to see much of a change from our currently high gas prices. Sources: Bloomberg, USA Today
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