:: The Pricing of Crude Oil

Picture of a person filling up the fuel tank of a red car.

By Rick Bobigian, President of Black Pool Energy

The price consumers pay for regular gasoline in the United States has risen from an average $3.05 per gallon in June 2007 to an average $4.05 per gallon in June 20081. According to numerous national media accounts, consumers are unhappy about the run-up in gasoline prices and have responded by changing their behavior and driving fewer miles. From June 2007 to June 2008, vehicle miles declined approximately 12.2 billion miles2, and that dip represents the first real decline in vehicle miles since the 1970s.

Motor fuel prices have soared because fuel manufacturers are paying a significantly higher price for each barrel of crude oil used in refining. In June 2007, the price of crude oil—the raw material refined into gasoline, diesel, kerosene, and jet fuels—averaged $63.45 per barrel; in June 2008 each barrel was $133.881. Simply put, manufacturers are doing what they all do when the cost of a raw material increases: pass the higher cost to consumers. In an unregulated marketplace, consumers will ultimately pay directly or indirectly for all increases in manufacturing costs.

Consumers do not like the current cost of motor fuels because it is inflationary; meaning, they pay more for motor fuels without receiving added value. On a personal level, inflation shrinks disposable income and shifts money from discretionary spending to cost-of-living expenses. That direct pressure on disposable income intensifies when all suppliers of goods and services increase prices to offset their higher fuel costs.

So if consumers do not like the current prices of motor fuels, what price would they like? The answer is simple: the lowest price. In this example, the lowest price is that which restores consumers’ disposable income to levels where they might once again make discretionary purchases. To restore retail prices to lower levels, consumers must continue to change their behaviors and consume fewer motor fuels.

Economically, the price of crude oil has risen from $63.45 to $133.88 because of disequilibrium between supply and demand. Crude oil producers are not the ones raising the price of crude oil. The buyers, representing manufacturers of motor fuels and related products, are competing for finite supplies, and it is that demand that causes crude oil prices to rise.

The reasons that crude oil supply and demand are not in equilibrium are numerous. Those reasons are presented and analyzed in more detail in courses offered by PETEX such as Petroleum Fundamentals and Introduction to Offshore Operations.

To enroll in these and other courses offered by PETEX, visit www.utexas.edu/ce/petex/courses/ or call 800-687-7052.

Rick Bobigian is Chairman of the PETEX Advisory Board and has been an instructor for PETEX since 1977. He is President of Black Pool Energy, a company active in exploration for and exploitation of crude oil and natural gas in Texas and Louisiana.

1U.S. Energy Information Administration, Petroleum Prices
2U.S. Department of Transportation, Federal Highway Administration, Policy Section

PETEX Newsletter Fall 2008

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