Image From thetrucker.com
Gasoline prices were much lower last time oil was $X, what gives?

I receive dozens of e-mails with people asking "why are gasoline prices so much higher than they were when oil was last at the same price they are today?". First of all, you all obviously know the price of oil, because you're asking why gasoline prices are higher today when oil is nearly the same price. Did you know that while there are literally dozens of types of crude oil, the media and papers for the most part only post one type of oil? That oil, called West Texas Intermediate (WTI), is suffering from identity issues. Let's just say that WTI oil is landlocked, and not available to global markets, meaning its not being subjected to the global economy, and thus a poor indicator of how other oil prices are rising and falling.

Did you know that refineries only in the mid-section of the U.S. have access and can refine West Texas Intermediate? Coastal communities rely on imported oil, which is subjected to the global supply and demand, rather than local supply and demand, and is viewed by many traders, analysts, and oil producing countries as the better benchmark because it is a global oil, not local oil. Herein lies the problem. People looking at the cost of crude are watching the price of WTI, a local oil that is only used in the mid-section of the U.S. Other refiners around the country buy imported oil at a far higher cost.

Part of the reason why WTI prices are so much lower than other oils is that supply of it is above average since it is landlocked in the mid-continent area. This is artificially depressing prices- that is- until more storage is built or a pipeline connects this oil to the global market.

Behind the oil scenes, there's an epic battle. West Texas Intermediate used to be a great benchmark oil- that is to say it was used to set the price of other oils. Since the price of it is now depressed, other oils that are subject to the global economy are higher because they haven't been artificially depressed. WTI oil is becoming less of a benchmark because of the unique situation that finds this type of oil unable to leave the U.S.

So while coastal refineries have always been stuck importing oil, that oil is much higher in price because it isn't subjected to the surplus situation that is unique with WTI oil. Canadian crude oil currently is also in a similar situation to WTI oil- it is used in the U.S., but it has no way to leave the country. This is where the Keystone pipeline comes in- it would connect Canadian crude oil with a place it could be exported from- shipping terminals in Houston. Thus the price of Canadian crude could rise once the pipeline is finished because it could attract more buyers- international buyers- that currently don't have access to it.

The bottom line here is that there are dozens of types of oil in use in U.S. refineries, and the media only mentions one type- WTI- and WTI is currently suffering from a unique situation that is keeping its price artificially low because it is product stuck here in the U.S. and can't even be shipped to some places here in the U.S.!

Following only WTI crude is outdated; it's a little like following only the Dow Jones Index (a basket of 30 'blue chip' companies) to get an accurate reflection on the direction of the entire U.S. economy... whereas NASDAQ reflects the progress of more than 3,500 companies.

To get a better idea of what oil prices are, you shouldn't follow WTI crude. I would follow Brent crude, an oil that is subject to international markets. In fact, follow both types. You'll see very interesting movements, and both oils don't necessarily rise or drop. In fact, you can also follow the price of Canadian crude oil. To see all the prices of many different types of crude, check this out: Worldwide crude indices

Now you have an idea that only following the price of one crude oil may not be the best idea- follow many, or a weighted average.

The fact is we can never draw a direct correlation between the price of crude that says 'if crude is X today then retail gasoline should be Y.'

And that's because of myriad other factors that impact wholesale prices and retail pump prices on a daily basis. These include: regional refinery outputs; crude oil and gasoline inventories that tie directly to local supply and demand; threats to infrastructure from weather or geopolitical events; global supply and demand, i.e., China, India, Europe; daily investment volume in hedge funds and commodities markets; and, the fluctuating value of the U.S. dollar versus the euro and other world currencies. Volatility creates a unique snapshot every day.