Crude oil is getting cheaper -- so why isn't gas?

http://finance.yahoo.com/news/Crude-oil-is-getting-cheaper-apf-14367525.html

NEW YORK (AP) -- Crude oil prices have fallen to new lows for this
year. So you'd think gas prices would sink right along with them.

Not so.

On Thursday, for example, crude oil closed just under $34 a barrel,
its lowest point for 2009. But the national average price of a gallon
of gas rose to $1.95 on the same day, its peak for the year. On Friday
gas went a penny higher.

To drivers once again grimacing as they tank up, it sounds like a
conspiracy. But it has more to do with an energy market turned upside-
down that has left gas cut off from its usual economic moorings.

The price of gas is indeed tied to oil. It's just a matter of which
oil.

The benchmark for crude oil prices is West Texas Intermediate, drilled
exactly where you would imagine. That's the price, set at the New York
Mercantile Exchange, that you see quoted on business channels and in
the morning paper.

Right now, in an unusual market trend, West Texas crude is selling for
much less than inferior grades of crude from other places around the
world. A severe economic downturn has left U.S. storage facilities
brimming with it, sending prices for the premium crude to five-year
lows.

But it is the overseas crude that goes into most of the gas made in
the United States. So prices at the pump will probably keep going up
no matter what happens to the benchmark price of crude oil.

"We're going definitely over $2, and I bet we'll hit $2.50 before
spring," said Tom Kloza, publisher and chief oil analyst at Oil Price
Information Service. "This is going to be an unusual year."

On the last day of 2008, gas went for $1.62 on average, according to
the auto club AAA, the Oil Price Information Service and Wright
Express, a company that tracks transportation data.

The recession in America has dramatically cut demand for crude oil,
and inventories are piling up. So prices for West Texas crude have
fallen well below what oil costs from places like the North Sea, Saudi
Arabia and South America.

That foreign oil sells in some cases for $10 more per barrel -- and
that doesn't even include shipping.

Brent North Sea crude, which feeds some East Coast refineries -- and
therefore winds up at many gas pumps around America -- now costs about
$7 more per barrel than the West Texas crude. Deutsche Bank analysts
say the trend should continue.

Historically, West Texas International crude has cost more. So nobody
bothered building the necessary pipelines to carry it beyond the
nearby refineries in the Midwest, parts of Texas and a handful of
other places.

Now that the premium oil is suddenly very inexpensive, refiners
elsewhere can't get their hands on it.

"It's so cheap," said Lynn Westphall, the senior VP of external
affairs at San Antonio-based Tesoro, which owns a half dozen
refineries on the West Coast and Hawaii. "But you can't just build a
pipeline to everywhere. We know we can't get it."

Tesoro's refineries in North Dakota and Utah use locally drilled oil
and Canadian oil, which also has been running about $10 more per
barrel than West Texas crude.

So why not build more pipelines? Because investing billions of dollars
over several years makes no sense when the prices could just flip a
year from now to where they were before.

"How long is WTI going to be cheaper than Venezuelan oil? Than
Canadian?" asked Charles T. Drevna, president of the National
Petrochemical and Refiners Association. "You just don't build a
pipeline like that."

At the same time, refiners have seen the same headlines as everyone
else about job losses and consumer spending. They've slashed
production just to avoid taking losses on gasoline no one will buy.
Result: Higher gas prices.

"Why should a refiner produce more gasoline when the stuff we produce
is not being used?" Drevna said.

Of course, complex explanations of the diverging price paths of West
Texas crude and gas are unlikely to placate frustrated drivers.
Memories of last summer's $4-plus gas have not receded.

"Drivers are being ripped off even more now than before," said Stuart
Pollok, who was filling up recently at a Chevron station in downtown
Los Angeles. He pointed out Exxon Mobil Corp. reeled in billions in
profits last year when oil prices neared $150.

Others see the conspiracy reaching higher.

"It got really low during the elections and now it's going back up,"
said Christel Sayegh, a 23-year-old graphic designer in Los Angeles.
"They do that every election, though, right?"
.

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