So, what’s up with Oil?
- So it looks like the rebels have control in Libya and there is lots of talk that oil production could actually come back online in Libya really quickly. So I would expect from my economy 101 classes that increased oil supply would equal decreased oil prices and I am looking at oil prices going up today. What’s up with Oil?
- Ok, so you are looking at a certain price, ok. You are looking at the price of West Texas Intermediate Oil with a symbol of WTI, which is oil pumped in America and stored in a place in Texas. What happens is that there are essentially two types of oil, that people price the oil on. It is West Texas Intermediate, it is light sweet crude and then there is this Brent stuff, which is pumped out of the North Sea. Not as good as WTI, but pretty close. So half of the oil in the world is based on Brent. And the Libyan oil is priced on the based on the price of Brent. It is a benchmark for that. The stuff that is pumped in America is based on the West Texas Intermediate oil. Two different benchmarks there. And what you are seeing is one benchmark rising, which is West Texas and one benchmark falling, which is Brent. The reason why Brent is falling, as you were taught in your econ 101 class is because Libya might be pumping more oil soon and if it does, it is going to affect the price of oil, based on the Brent.
- So my instinct was right, but I was looking at the wrong indicator?
- Exactly! You are looking at the wrong indicator. The reason why the West Texas Oil is rising is because of this place called Cushioning, where they store all this oil. And it is all about the demand for that oil. It is stored, stockpiled in this place. And over the last few months we have had a lot of refineries, which doubled the demand, but could not get the oil. There is a lot more demand for the refineries, if not for the economy and that is increasing the price of the WTI. So this is why you are seeing this disparity of Brent going down, because of more production in Libya and WTI going up, because of more demand in the States.
- And what I hear you say is that Libya isn’t probably going to affect the price I pay at the pump?
- I think that what is going to affect the price that you pay at the pump more is the state of the global economy and the national economy. If there is less demand, if people aren’t going to be driving as much, then you will see the demand fall and prices will fall with that.
