Is Saudi Arabia’s Trojan Horse Spiking Gasoline Prices Americans Are Paying at the Pump?

As featured on The Huffington Post:

Sorry, this is going to be on the longish side. Consider the following one-year price fluctuations:

On June 27, 2012 the price for:
Gold – $1561.80/oz one year later $ 1235.50 oz.
Silver- $ 26.48/oz one year later $ 18.84 oz
Copper-$ 3.32/lb one year later $ 3.05 lb.
Wheat $ 7.32/bu one year later $ 6.72 bu.
Iron ore $ 143.9/tn one year later $ 115.30 tn

The erosion in commodity prices has been significant during the course of the past 12 months, with very few exceptions, but one stands out dramatically:

On June 27, 2012, the price for:
West Texas Intermediate (WTI) crude oil as traded pn the CME (Chicago Mercantile Exchange) Group’s owned New York Mercantile Exchange was-
$ 77.69/barrel
and one year later-
$ 97.05/barrel
an increase of near $20/barrel or 25 percent, having a direct bearing on the price of gasoline throughout the land.

This in a year when domestic production of oil jumped by 14 percent, increasing by over a million barrels a day, and while American production of shale oil continues to expand at record high levels, commercial inventories of oil are at their highest levels not even counting the Strategic Petroleum Reserve, and Americans were driving less. What had been a national consumption of crude oil of some 20 million bbls/day has dropped to nearer 18 million bbls/day. Clearly something is deeply amiss.

In addition during this period the American economy has been blessed by the enormous benefits accruing from tapping into the America’s vast reserves of shale natural gas. Today natural gas is quoted at some $3.60/million British thermal units vs. the cost in Asia at $14.49/mmbtu, giving large swaths of American industry enormous competitive advantage.

(Please note — and amazingly — at $3.60/mmbtu the quotient of energy delivered by natural gas would be equivalent to that of a barrel of crude oil costing $21/bbl).

Now the question is clearly raised, if the nation is benefiting so handsomely from its newly developed riches in natural gas, why have similar developments in the spectrum of oil production not resulted in a comparable impact?

Perhaps the answer lies in an event that took place just over a year ago, in May of 2012. A turning valve ceremony took place at the Motiva Refinery in Port Arthur, Texas. Thereby the Motiva refinery became the largest refinery in the United States with a refining capacity of 600,000 bbls/day. Ironically this, our largest refinery, is owned by the world’s largest oil producer, Saudi Aramco together with the Royal Dutch Shell Oil Company, Aramco’s partner in the massive Aramco-Shell SASREF refinery located at the very heart of Saudi Arabia’s petrochemical industry at Jubail, Saudi Arabia.

In the normal world of business and competition a manufacturer or refiner would strive to access their essential supply of needed base materials at the most competitive price possible. That engagement is a key mechanism in determining the market price for raw materials, otherwise known as the law of ‘supply and demand.’

Yet, here we have a situation whereby the Motiva refinery’s incentive is not necessarily, if at all, to produce competitively priced gasoline, helping to lower its price at the pump for the American consumer. One could conjecture that Motiva’s principal owners’ overriding priorities are to keep the price of crude oil as high as possible, given that Saudi Aramco is the world’s largest oil producer, and Royal Dutch Shell one of the largest corporate producers

How would this be done? Perhaps in a number of ways. Being owners of a domestic refinery serving as a ‘Trojan Horse’ would give them open, and largely unquestioned access to the domestic oil market. Possibly either through open market purchases at levels that would push prices higher either directly or through agents, or likewise through the purchase of crude oil futures on the commodity exchanges such as the New York Merc. Or in turn purchasing domestic oil at the highest prices reasonably possible, offset by artificially low transfer prices for Saudi oil imports permitting Motiva’s P&L to reflect industry norms. Or perhaps, through strategically timed purchases at instances of peak demand pushing prices higher yet. And on.

All a matter of conjecture? Significantly, only last week it was reported that the Federal Trade Commission will be opening a probe on oil price fixing (please see “FTC To Probe Oil Price Fixing. Saying So Doesn’t Make It So” 06.25 13).

Port Arthur, Texas might be a good place to start.