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Economy / Economy

A Crude Hit to the Recovery

In this image taken with a fish-eye ultra wide angle lens, regular-grade gas is shown at $3.99 a gallon at a Shell gas station in Seattle, Friday, April 15, 2011.(AP Photo/Ted S. Warren)

photo of Jim Tankersley
November 29, 2011

The U.S. economy missed out on creating up to a quarter-million jobs this year because it lacked the infrastructure to capitalize on a rare divergence in global oil prices, a National Journal analysis shows.

Simply put, American consumers paid a historically high premium for their gasoline. The economy suffered for it.

The effect appears to be dissipating well before the 2012 election, when slow growth, a limping job market, and persistently high gas prices appear set to weigh heavily on the reelection fortunes of President Obama and congressional incumbents. But the high premium has already inflicted damage on the struggling U.S. recovery from recession.

 

Infographic

Here’s the math: From 2001 through the end of 2010, Americans paid, on average, about 90 cents more for a gallon of gasoline than they would have paid for a gallon of West Texas Intermediate crude, which is the benchmark for U.S. oil prices. That’s the historical markup, if you will: 90 extra cents for refining, taxes, and transportation of oil.

But this year, Americans have paid about $1.30 more for a gallon of gas than for a gallon of West Texas crude. That’s 40 cents above average per gallon and nearly $20 above average per barrel. It’s also a decent hit to the domestic economy.

Economists at IHS Global Insight project that for every extra $10 per barrel that Americans spend on gasoline, annual gross domestic product growth slows by 0.2 percent. Employment falls by 120,000 jobs. So a $20 per barrel increase over what Americans historically have paid for gasoline, compared to crude oil, would cost the economy 0.4 percent growth and 240,000 jobs.

Ian Shepherdson, chief U.S. economist at High Frequency Economics, reaches a similar conclusion with different calculations. Based on Americans’ total gasoline consumption figures from 2010, Shepherdson wrote in an e-mail, an extra 40-cent premium per gallon will probably cost U.S. drivers (and the economy) $65 billion this year. That’s the equivalent of 0.4 percent of GDP.

The missed growth flows from a temporary opening of a large price gap between two of the most popular types of oil that trade on global markets: West Texas, a light sweet variety that is stockpiled in Oklahoma, and Brent crude, a product of the North Sea that traders often use as the proxy for oil prices worldwide.

West Texas and Brent are similar in quality. Their prices tracked each other closely until late last year, when global oil prices began rising, culminating in the early-2011 spike linked to the Arab Spring. While prices rose worldwide, Brent prices rose substantially more than West Texas prices – because a new glut of West Texas supply was flooding the market, from increased production in Canada and North Dakota.

By this fall, when the gap was widest, a barrel of Brent cost $28 more than a barrel of West Texas.

That could have been great news for American motorists at a time when gasoline prices were soaring. But U.S. drivers, by and large, didn’t benefit from their country’s own cheaper oil.

Many of them couldn’t get it: West Texas crude is refined in the Midwest, but there’s no sufficient pipeline or shipping route to easily transport that oil to the coasts. So drivers in New York and Washington, for example, kept pumping their cars full of gasoline refined from the more expensive, imported Brent crude, while cheaper West Texas barrels piled up on the Plains.

Even Midwest customers, though, paid historically high margins for their gasoline compared to the West Texas price. Data from the federal Energy Information Administration suggests gas prices moved in parallel across different U.S. regions this year – delivering high profits to some refineries, but at the expense of consumers.

“If you can transport gasoline across U.S. states, the refined product should sell at a similar price as a result of physical arbitrage of the gasoline market,” economist James Hamilton, an oil markets expert at the University of California-San Diego, wrote earlier this month. “A big effect of the Brent-WTI spread was thus to raise refiners' margins in the central U.S., with the price of gasoline in the U.S. tracking Brent more closely than WTI since the two prices diverged.”

There’s no evidence that the oil industry manipulated the price spread to boost refining profits; the companies just appear to be benefiting from the nation’s inability to move cheaper oil around freely. Energy industry groups say expanding America’s pipeline infrastructure – including potential Obama administration approval of the Keystone XL pipeline to carry oil south from Canada – would minimize the odds of another wide price split in the future.

“Putting in that capacity – getting more secure crude from Canada in, and also putting an extension (of the pipeline) in down to the Gulf – would make a pretty good difference,” said John Felmy, chief economist at the American Petroleum Institute.

The good news is that the price spread between Brent and West Texas has narrowed in recent weeks. As Hamilton notes, oil companies have stepped up efforts to deliver more West Texas crude to the coasts. Enbridge announced this month that it will pay more than $1 billion to control the Seaway pipeline and begin pumping oil from Oklahoma to the Gulf Coast. Other new pipeline projects may be in the works.

Markets have responded to the news already. The spread between West Texas and Brent has fallen in recent weeks. The premium drivers pay on gasoline versus West Texas crude is falling along with it, but it’s still higher than average. Last week, the difference was $1.07.

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