Sunday, 8 April 2012

Pump Primer: It's the market

First check the chart.   The price of oil is as perfect match to the S&P500 as this world sees.  It's not  politicians'  pet theories and scarcely the alarums of war that set the price of oil.  Plain old supply and demand that rises and falls with economic activity is the one best explanation.
Second, there isn't a price of oil any more than there is a price for potatoes.  It depends what kind you are selling and who is buying.  I learned more from this one article at than my reading over the last ten years: (h/t Instapundit).

Main points:  The  US is divided into 5 oil districts but it's not that easy to transfer supplies between them.  The East Coast buys mostly world price oil (Brent Crude above $110) and four eastern refineries have had to shut because of this price.  The West Coast gets some Alaskan oil but buys even more at world prices, pushing up California prices at the pump.  At the Gulf Coast is West Texas Intermediate oil (WTI) selling at a 20% discount to Brent, quite a bit of which was being piped north to Cushing Oklahoma which has refineries well suited to this grade.  Coming into Cushing from the north is Bakken crude (priced about the same as WTI) and our oil sands crude which is discounted 45% from Brent because it has to reach the refineries at the Gulf Coast that can handle it best. 45% |discount!  That's why a Canadian company bought a north-flowing line so it can reverse it to run from Cushing to the Gulf instead.    There's lots of relatively cheap oil in the central US but it's backed up at the Cushing bottleneck.  Building transfer capacity in the US is hugely important.  Drilling new wells in Pennsylvania and New Jersey is going to make a big difference on the East Coast but "Drill, Baby, drill" won't change much elsewhere until transport is fixed.  Last of all, it costs about 10 cents/gallon extra to process summer gasoline and the swing plant in Puerto Rico that used to help the switchover was mothballed this winter.
I've seen 69 cents to $2.29 in Victoria this year.

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