Tuesday, May 17, 2011

Why The Price Of A Gallon Of Gasoline Seems Elevated

A great deal of rhetoric is being expended on the fact consumers are paying high prices at the pump for a gallon of gasoline. Politicians are implying the oil companies are price gouging. Much of the attention is focused on the fact WTI (West Texas Intermediate) Cushing crude oil has fallen to around $97 per barrel. In September of 2008 when WTI was declining from its high of nearly $140 a bbl, a gallon of gas cost a consumer $3.70. The current price for a gallon of gas is around $4.00. So yes, pump prices do seem a little elevated on the surface. On the other hand, there is more at play than WTI crude prices.

From HORAN Capital Advisors

Since early this year, the price of Brent crude began to climb at a higher rate than WTI crude. At the moment, WTI is trading around $97 bbl and Brent is trading around $110. A week ago Brent was trading near $120 per bbl.

From HORAN Capital Advisors

The higher Brent price is largely due to the unrest in the Middle East. This unrest has placed a higher risk premium on crude prices that are exported and created more demand by European countries for Brent crude. Additionally, since the U.S. is a large importer of crude, gasoline pump prices are likely being set more off of the Brent price versus the WTI price.

Some in the media have indicated gasoline prices should be around $3.00 per gallon. However, in 2008, this was more the case when crude prices were rising than when they were falling. In a market driven economy, prices seem to always go up faster than they come down.

The disparity in price between WTI and Brent does not appear to be narrowing much at this point in time. Given the volatile situation in the Middle East, the price disparity could continue through the summer and higher than expected gasoline prices at the pump may be a fact of life near term.

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