Posts tagged “WTI”
Crude oil prices surged last spring following disruptions in oil production from Libya, and had been drifting down during the summer and fall. But since the beginning of October, the price of West Texas Intermediate and Brent crude oil have both risen by over 30%, putting them back up near where they had been last spring. What’s changed in the world since the beginning of October?
Crude oil prices this week reached their highest level since last April. What will that mean for U.S. consumers at the gas pump?
The first question to be clear on is which crude oil price we’re talking about. Two of the popular benchmarks are West Texas Intermediate, traded in Oklahoma, and North Sea Brent. Historically these two prices were quite close, and it didn’t matter which one you referenced. But due to a lack of adequate transportation infrastructure in the United States, the two prices have diverged significantly over the last year.
My rule of thumb has been that for every $1 increase in the price of a barrel of crude oil, U.S. consumers are likely to pay 2-1/2 more cents for a gallon of gasoline. The yellow line in the graph below plots the average U.S. retail price of regular gasoline in the U.S. over the last 4 years. The blue line is the gasoline price you’d predict if you applied my rule of thumb to the WTI price (assuming 80 cents/gallon for average tax and mark-up), while the fucshia line gives the prediction if you assume that the U.S. retail price is based on Brent. The three lines were quite close until Brent began to diverge from WTI at the beginning of last year. Since then, the U.S. retail price has tracked the world Brent price much more closely than it has WTI.
Here’s my suggestion for how to become rich: buy low and sell high.
It’s a strategy that works for individuals, and can work for the entire nation as well. If you can figure out a way to find resources whose value in their current use is not very great– in other words, if you buy low– and redeploy them somewhere else where their value is much greater– in other words, sell high– then you will not only add to your personal wealth, you will be creating new wealth for society as a whole. The process of allocating resources to their most efficient use is the heart of what drives economic growth. The fact that individuals have a strong personal incentive always to be looking for better ways to do that is the primary factor responsible for the standard of living that we enjoy today.
Let me give a concrete example of what I’m talking about. On Friday, you could buy a barrel of light, sweet crude oil produced in North Dakota for less than $81. On that same day, oil refiners in Port Arthur on the coast of Texas were paying around $110 to import a similar grade of oil produced in Nigeria. That’s $30 worth of incentive to you to try to figure out a way to transport oil from North Dakota to Port Arthur in order to replace a barrel of imported Nigerian oil with Williston sweet. As a nation, if we could divert some of the resources we are currently devoting to pay for oil imported from Nigeria, and use them instead to enable the Port Arthur refinery to get its oil from North Dakota, we will become richer.
Buy low, sell high.
So there’s a very concrete mission. How can you go about implementing it?
Here are my choices for the Top 10 energy related stories of 2011. Don’t get too hung up on the relative rankings. They are mostly in no particular order, although I think the top story is pretty obvious. 1. The Fukushima Daiichi nuclear disaster On March 11, 2011 the tsunami that flooded Japan’s Fukushima Daiichi nuclear plant resulted in the worst nuclear crisis since Chernobyl. The tragedy spurred heated debates over whether nuclear power could ever be totally risk-free. Several countries decided that the potential consequences were just too great, and reversed their plans for new nuclear plants and in some cases shuttered existing plants. The incident will likely slow the global development of nuclear power for years, just as… Continue»