Currently, the price of crude oil as measured by the price of West Texas Intermediate crude oil is around $100/barrel, but diesel fuel prices and gasoline prices are currently higher than the last time it was at this level (Chart A). What's going on?
Most refiners that supply diesel and gasoline to service stations and truckstops are paying the equivalent of a much higher price than that of West Texas Intermediate crude oil. This is due to an unprecedented disconnect between crude oil futures contracts on the New York Mercantile Exchange (NYMEX) and the real cost of crude oil from the Gulf of Mexico, Saudi Arabia and elsewhere. The delivery point for the settlement of NYMEX contracts is Cushing, OK, and crude inventories in Cushing are at extremely high levels due to increased production of crude oil from Canada and the Great Plains that is shipped to Cushing. The U.S. pipeline system was designed to transport imported crude oil from the exterior of the country to the interior, not vice versa, so there is a bottleneck of transporting large supplies of crude oil from the interior at places such as Cushing to the southern refineries in Houston and Port Arthur, TX. As a result, these refineries are paying higher prices for crude oil imported from abroad. This is causing East and West Coast refiners to pay a premium for imported oil as well.
The large supplies of West Texas Intermediate crude oil in the interior in comparison to tighter global crude oil supplies is reflected by the increase in the spread between the price of West Texas Intermediate crude oil and Brent crude oil (Europe). Normally, West Texas crude oil and Brent crude oil trade at parity (Chart B). The pipeline bottleneck is limiting the ability of moving large supplies of crude oil from the interior to refineries on the coasts, so refineries are instead paying the going international price for Brent oil.
There is often a lag of weeks or months before oil contracts reach the global spot market price, meaning that if oil prices remain at these elevated levels for a sustained period of time, higher energy prices will be the result. This will cause the growth rate of consumer spending on non-energy goods to decelerate and may cause consumption of non-energy products to decrease. This would cause a severe inventory correction as wholesalers' and retailers' sales fall below expectations, causing a steep decrease in orders as they try to bring inventories back in balance with sales.
Rising diesel fuel prices are causing fleets to increase fuel surcharges. Commercial Motor Vehicle Consulting does not believe carriers have the pricing power to substantially increase both fuel surcharges and basic freight rates. Fuel surcharges do not completely cover increases in diesel fuel prices, so rising diesel fuel prices are a drag on profitability.
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