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.
National Journal
Add to Briefcase
Jim Tankersley
Nov. 29, 2011, 1 a.m.

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.

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.

Also From Na­tion­al Journ­al:
Gin­grich Sup­ports S.C. Im­mig­ra­tion Law | In­siders: Don’t Use Mil­it­ary in Asia | High Gas Prices Stall Eco­nomy | Perry Says He’d Fire Bernanke, Geithner | Eco­nomy Stats Show Out­look for Obama

Welcome to National Journal!

You are currently accessing National Journal from IP access. Please login to access this feature. If you have any questions, please contact your Dedicated Advisor.