I was surprised to see a diary with what I believe to be an incorrect and easily refuted claim about rising gas prices briefly make the Recommended list yesterday. Site outages hampered discussion then, so here's my take on the diary and where it fell short.
I've written a few diaries on gasoline here this month.
So naturally, I found the diary Countdown to $100 oil (41) - oil more expensive than it appears interesting. It's part of an excellent series I enjoy reading and frequently recommend, from one of my favorite diarists. The main point of diary 41 was that the ratio of the Brent and WTI Cushing spot prices has changed over time. It has typically been in the range 0.95 to 1.0 meaning Brent was cheaper, but is now fairly consistently in the range 1.0 to 1.1 (Brent being more expensive) as the following graph I generated illustrates.
I've no problem with that. But I believe the diary was very incorrect with this claim:
So why have gasoline prices been going up so much lately? Price gouging by the oil companies is a temptng answer, but there is actually a simpler answer: the price of oil is wrong.
For an explanation of that bold claim, follow me below...
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What is distorted is the way oil prices are currently perceived. To most outsiders, the WTI price is the only one ever used and headlined, and it is not showing the price increase that other indices (and that gas prices, that follow actual oil supply prices) are 'enjoying' lately. Thus that apparent mismatch between oil prices and gas prices.
Oil is currently not in the low 60s, it is above $70 per barrel and that explains 30 cents on gas prices.
There are two problems with this. Firstly, a 10% difference (from "low 60s" to "$70") in the crude oil price would not have anything like a "30 cents" impact on US$3 gas prices. Crude oil accounts for only 50-60% of the pump price with taxes, refining, and margins all taking a slice. (And most Americans would love to be paying only 30 cents more - the average US price has increased 70 cents in the past eight weeks.)
Secondly, one cannot reasonably claim that an increase A in a raw material (crude oil in this case) accounts for most of a retail increase B in a derived product (gas at the pump) without examining the levels of both A and B. The diary presented year-long graphs for Brent and WTI Cushing oil prices, but not a single gasoline price.
To address this, here are a few statistics on the relationship between the Brent spot price and the average US gasoline price at the pump from latest Department of Energy statistics. In 2006, the two prices had their peak in the same week: Brent topped $78/barrel and the DOE average for gasoline reached $3.004/gallon in early August. (It was the only weekly average price to reach $3.00 in 2006.)
The comparison is very different today. Brent has just risen back over $70 a barrel, and the latest weekly average gas price is $3.211 per gallon. In just the past four weeks, Brent has risen 4% while gasoline has risen 15%. So far since the start of 2007, Brent is up 20% while gasoline is higher by 40%.
To show that the 40% increase is not uniform, here are increases since 1/1/2007 for selected cities:
- 28% in Seattle, WA
- 32% in Miami, FL
- 40% in Clevelend, OH
- 53% in Denver, CO
To emphasise the point, we can also make the comparison with other crude oil prices and national average pump prices.
Here are approximate crude oil increases so far in 2007:
- 8% for WTI Cushing
- 15% for the DOE's world export-weighted average
- 20% for Brent
- 23% for Malaysian Tapis
Now here are estimated price increases since the start of 2007 for regular gasoline at the pump, in the United States and a few other nations that have relatively low gas taxes.
- 8% in New Zealand (even when all taxes are excluded, the rise is only 12%)
- 11% in Australia (with higher than usual demand because of drought)
- 26% in Canada (with record high refining margins to meet US demand)
- 40% in the United States (half of that coming in the past 6 weeks alone)
(Gas price references: USA (large Excel file); Canada; Australia; NZ.)
Any gasoline price increase should be a smaller percentage than the increase in crude oil, since there are other components in the pump price. Clearly, the American gas hike outstrips the oil increase regardless of whichever oil index one wants to claim as being most applicable to the USA.
If a 40% retail increase in bread was blamed on a 20% rise in the cost of flour, or a candy price hike of 40% was explained by a 20% rise in raw sugar costs, very few people would believe it. Any claim attributing the US gasoline hike of May 2007 to rising crude oil prices can be put in the same category.
A more justifiable reason for the American price increase is suggested by the graphs at a recent This Week in Petroleum edition that discussed the issue. Scroll down to the end, take a look at the graphs and you'll see that U.S. crude oil and distillate stocks are in healthy shape at the high point of their average range but gasoline stocks are down 11% on this time last year, well below the average range. In fact, early May gasoline reserves reached a low not seen since the weeks after Hurricane Katrina. This is a more plausible reason for the American price hike than crude oil, which has risen no faster than previous increases and is still no more expensive than the same time last year.