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Why doesn't the U.S. set oil prices like the cartels do?

The Tampa Tribune
Published:   |   Updated: March 19, 2013 at 12:31 PM

Q: Why is domestically produced oil priced at the same price as Middle East oil? The cartels set the price for Middle East oil, but why don't we price our own oil separate from the cartels? Ours should be cheaper!

- Richard, Plant City

A: This answer may please no one, including fans of conspiracies. But here goes.

Oil is traded around the world and is one of the most easily transported mass products.

First, we don't set this region's oil price because "we" don't own the oil. Producers do. Unless the United States decides to nationalize petroleum production, it is the oil producers and refiners that ultimately have the most impact on supply and price at the pump.

Some countries do take direct ownership or control of all or parts of oil production, distribution, sales and prices. (Venezuela, China and Russia do in some respects, but not the United States.)

Absent direct regulation of prices for domestically produced oil, a world market tends to set prices.

Second, those prices even out quickly around the world, partly because supertankers can travel the world to any major port.

"The actual transportation costs to move a tanker of oil from Saudi Arabia to the United States aren't that big," said Simon Wardell, a senior oil analyst at the London-based energy consulting firm IHS Global Insight. "We're talking about a few cents a barrel."

That means a producer in Texas, Louisiana, Alaska or the Gulf of Mexico could sell their oil to refiners or marketers anyone in the world, and the same goes for producers in Saudi Arabia.

That tends to quickly flatten out prices in the Middle East or the United States, Wardell said. For example, a Texas producer has less incentive to discount their oil to U.S. buyers if a buyer abroad offers more money.

Third, there are some major differences in the quality of oil from different regions.

Like wine produced in from California vs. Kansas, there is a wide spectrum of quality. Some oils have higher sulfur contents, making them less appealing to markets with more stringent environmental standards.

So world oil markets tend to start with "marker" oils. The "West Texas Intermediate" or "Light Sweet Crude" is a marker oil that's highly desirable, adding to its price on the market, and it's a major indicator tracked by the New York Mercantile Exchange for futures contracts.

From there, different producers add a discount or premium difference to their oils above or below WTI, depending on how they differ. Oil from Libya, by the way, tends to be of high quality - one reason that disruptions there spook the markets so much.

Only about 1 to 2 percent of all oil traded on the markets are actually those "marker" oils, Wardell said. Everything else is priced off those markers.

- Richard Mullins

Submit your question here or visit our Gas Prices page and retail writer Richard Mullins will get you the answer.

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