Writing about oil prices last night I wrote that the price of gasoline is set in the global market for oil. It’s worth adding some nuance to that claim, because things have actually changed a bit in this regard. Here’s a look at two different price series for crude oil, one the Brent Crude Index in the North Sea the other the West Texas Intermediate Index at the Cushing, Oklahoma pipeline interchange:
As you can see, there’s a global market so the prices are the same. But look more recently:
A gap! Now what you’ll see here is that the prices do tend to move in tandem. When WTI gets more expensive, so does Brent. When Brent gets cheaper, so does WTI. So I stand by the claim that the consumer price is basically driven by global market conditions. But the divergence really has become substantial in recent years:
You might wonder why that is. The answer is that we’ve had a lot of technological improvements in North American fossil fuel extraction recently but precisely because these are new developments we don’t have the infrastructure properly set up to take advantage of the situation. Yet this is also the reason that projects like the Keystone XL pipeline are very unlikely to reduce North American gasoline prices. The short-term goal of the pipeline is to deliver more cheap North American crude to American refineries so it can be exported. In the longer-term, oil interests would want to reduce legal restrictions on the export of crude oil to more directly take advantage of the gap in prices.
That’s not bad economic policy per se—exporting more mineral wealth is a perfectly valid wealth building strategy (although there’s some suggestive evidence that it will reduce entrepreneurship in the long run) but this is different from a strategy to reduce domestic gasoline prices. Realistically, the reality that this infrastructure is more likely to be used for exports than to make domestic gas cheaper is a point in its favor. Cheap gas is something voters like, but it’s not a very sound policy goal, while more exports could actually be helpful in a number of ways.
