advertisement
Gasoline prices are likely to continue rising, and it's not just because crude oil prices have risen above $75 a barrel.
Oil refineries, which usually buy their oil at a price below that headline price, have seen their discounts virtually disappear. So the price they pay for oil is up twice -- once because the headline price of oil is higher and a second time because their discounts have just about vanished. You can bet that those two price increases will be passed along to anyone filling up at the gas pump.
Very little oil actually trades at the number that shows up in the headlines. That number represents the price of the futures contract, an option to buy oil in the future, on a specific grade of light sweet crude oil. So, for example, on July 16, when the headline number read $74.15 in the futures market, in the cash market the prices for two widely used benchmarks, West Texas Intermediate and Brent crude from the North Sea, traded at $74.16 and $79.73, respectively.
Oil prices vary widely from there. On the same day, two other U.S. grades of crude, Louisiana Sweet and West Texas Sour, traded at $80.26 and $70.06 a barrel, respectively.
That's a big swing from $80.26 to $70.06. About 15%.
Europe has its own grades with varying prices ranging from Forties at $80.53 to Urals-Mediterranean at $77.68.
And so does the Middle East. Crude from Saudi Arabia sells as Extra Light, which sold as of July 16, and Arab Light, Arab Medium and Arab Heavy, trading at discounts to the Brent benchmark of $3.20, $4.90 and $6.60, respectively, a barrel.
All together there are about 160 traded grades of crude oil, each with its own price.
More from MSN Money
Why all the different prices? Three reasons, really. First, the closer the crude is to the refinery, the lower the transportation cost and the more valuable the oil. So Louisiana Sweet sells at a premium because it is produced near the big cluster of refineries in Louisiana and Texas.
Second, some crude oils are more difficult to refine, and not all refineries can handle these grades. The more sulfur in an oil and the more viscous (thicker) it is, the harder it is to refine. Crude oils such as West Texas Intermediate and Nigerian Bonny Light, which are low in sulfur and viscosity, are easier to refine and sell at a premium. Turning the heavier parts of the heavy grades of crude into marketable products often requires very high temperatures and the addition of catalysts. The lighter hydrocarbons that will become propane, butane and gasoline when refined boil at lower temperatures and require less energy in processing.
Video on MSN Money
Jubak’s Journal: Oil price outrageOil is one of the few industries still built on a 19th-century model, where one company handled everything from drilling to refining to gas-station sales. That’s why consumers are so quick to blame Big Oil for high prices, argues MSN Money’s Jim Jubak.
Third, and most importantly, when refined some crude oils yield more of the most valuable lighter products such as gasoline and less of less valuable products such as heating oil. Crude oil is actually made up of a variety of different hydrocarbons that are separated during the refining process. Typically, about 70% of the volume of light sweet grades of crude oil can be turned into gasoline and diesel fuels. That yield of valuable light products drops to about 50% for heavy sour crude oil grades from the Persian Gulf.
So you can see why light sweet oil should sell at a premium. And why refiners look for a discount when they buy heavy sour oils.
Normally.
Continued: Why it's different now
Rate this Article
High