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Do Elevated Global Oil Prices Continue to Reflect Wider Mideast Turmoil?

October 9th, 2013 | by Morris Beschloss | Comments

Under normal circumstances, the global price of crude oil should have come down drastically, both for U.S. based “light” West Texas Intermediate, as well as the universal Brent crude, which has averaged $5 per barrel higher than domestic crude oil. Although these margins have been as high as $15 to $20 higher than the U.S. drilled crude in the past, this has largely been based on the geopolitical turbulence emanating from the increasingly unstable Middle East and North Africa turmoil.

Under normal supply/demand circumstances, the price of oil, generally, should be at least 10% to 20% lower than the current pricing levels manifested by the combination of circumstances comprising the ongoing world market.

On the one hand, the U.S. “fracking revolution” is bringing unprecedented new production to America’s 140 plus oil refineries almost weekly. Even the lack of an up-to-date pipeline system has been ameliorated by a vastly accelerated railcar system, abetted by trucking, to bring the ample crude oil supplies to America’s vast refinery network, which has expanded its “derivative” production (gasoline, diesel, heating oil, jet fuel, etc.) by 15% in the past five years. This has been accomplished by onsite expansion and upgrading; there has not been a new startup refinery in 30 years, and none are now being contemplated.

On the other hand, the world market price for crude oil has greatly appreciated, since the supply factor from major suppliers Iraq, Libya, and even Kuwait, has either diminished or is under the threat of internal security deterioration. Iran, once a major supplier to Europe, has been absented from these markets due to the sanctions imposed on them. A major part of Iranian oil shipments are now concentrated in China, and other Asian nations not participating in sanctions.

With the overall concern for ongoing troubles not alleviated after the impotent U.N. meetings in New York City in late September, this unstable situation is likely to get worse rather than better. That is why traders are hedging their long term bets. Although this normally should not impact American pricing, either at the refinery or retail levels, oil has become a universal commodity, where worldwide demand, and concern for future developments are heavily weighing on U.S. pricing, generated by refineries whose derivative production has swelled America’s growing record exports, especially into Mexico and Central America.

At present, however, the “price at the pump” has actually digressed materially from a year ago, keeping the fear of “runaway gasoline prices” out of the headlines. Even seasonal factors are not as influential as before, since the year-long pricing of oil derivatives has stayed high year-round, but not subject to major ups-and-downs as in previous years.
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