Even people who don’t usually follow the price of crude oil are bound to have noticed its sudden drop and the ramifications that continue to unfold. To help people who are starting to pay close attention to the oil market for the first time, Sterne Agee chief economist Lindsey Piegza has put together a quick primer to clear up some of the common questions and misunderstandings that people may have.
The WTI-Brent spread
The first thing you probably noticed when you started checking oil prices is that there are two of them, and they don’t track each other perfectly. WTI, or West Texas Intermediate, is refined in the mid-western US as the name implies, and it serves as the benchmark price within the US. Brent crude, actually a combination of oil from 15 different oil fields in the North Sea, is the international benchmark for oil.
“Historically, Brent and WTI crude have been very competitive with an average price spread of about $1 per barrel,” writes Piegza. “Beginning in 2011, however, WTI dropped noticeably below the price of Brent, with an average spread of almost $13 a barrel continuing to present day. The growing price difference between the two grades has been a direct result of increased domestic US production and more efficient transportation of oil to the East and West Coasts.”
US still a net crude oil importer
While the big structural change in the oil industry is the explosion of American shale oil, Piegza also points out that the US is still a net importer of crude oil, and the difference is a couple orders of magnitude, and petroleum imports are double petroleum exports, though the US is a net exporter of crude oil products. We get the largest share of our oil imports from Canada, followed by Saudi Arabia, Mexico, and Venezuela.
Gasoline taxes in the US and Europe
You may have also noticed that gasoline prices don’t fall as quickly as crude, and it’s not just a matter of gas station owners clinging to higher prices. Crude oil makes up about two-thirds of the cost of gasoline, with overhead business costs and taxes making up the rest, muting the effect on consumer spending. In Europe the effect is even more pronounced because gasoline taxes are so much higher.
“Of the total cost of one gallon of gasoline, currently priced at €5.75, or the equivalent of $7.10, $3.55 (€2.88) would be the European government’s cut. Here in the US, the current price of a gallon of gasoline is $2.48, of which the federal government receives $0.30,” writes Piegza.