Energy

Will Sharp Rise in Crude Increase Gasoline Prices?

Gasoline pump
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The turmoil in Iraq is raising concerns about the ability of the country to continue delivering about 3.3 million barrels of crude a day to the global supply. Iraq is currently the second-largest producer among OPEC members, trailing only Saudi Arabia.

Iraqi production reached a high of 3.6 million barrels a day earlier this year, and the Iraqis said as recently as Tuesday that the country would reach its goal of 4 million barrels a day by the end of this year. Unless the political situation magically stabilizes quickly, that will not happen.

The threat to Iraq’s oil production has boosted prices for both Brent and West Texas Intermediate (WTI). On the ICE Thursday morning, Brent for July delivery traded at $111.13, and WTI traded at $105.37 on the NYMEX, up 1.1% and 0.9%, respectively.

Adding to the uncertainty about Iraqi production were Wednesday’s report on U.S. inventories and the decision by OPEC to maintain its target ceiling of 30 million barrels a day. The U.S. Energy Information Administration reported that U.S. crude inventories were down 2.6 million barrels in the week ended June 6. And if a significant portion of Iraqi production is halted, only Saudi Arabia has the spare capacity to replace a portion of it.

Why, if the United States is producing so much oil right now, will gasoline prices rise in response to the events in Iraq? Especially because U.S. crude cannot be exported. The United States still imports around 7 million barrels of oil a day and that oil is priced on the Brent benchmark. As long as some U.S. refiners are paying the Brent price and selling their refined products at a higher price, all U.S. refiners will sell at the higher price regardless of how much the refiner pays for crude. Refiners in the United States that have access to cheaper U.S. crude will raise fuel prices and pocket the higher profits.

The price increases will start fairly quickly too. The longer the situation in Iraq continues, the more U.S. drivers can expect to pay at the pump.

ALSO READ: EIA Predicts Higher Gas and Crude Oil Prices

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