THE BLOG
02/21/2011 02:43 pm ET | Updated May 25, 2011

Why Gasoline Costs Are Too Damn High

The U.S. is being fooled to believe that the gas prices we see on TV and in newspapers aren't actually so bad. But they are. Relatively, they are much worse now than they were in the past, and are likely to get even worse as spring and summer approach.

We watch the TV and look in the newspapers, see that crude oil is selling for $87 dollars a barrel and think: "yeah, those are high prices, but I remember when oil was over $100 dollars, even $120 and $140 dollars a barrel -- this doesn't seem so bad yet."

But you're being fooled. You're being fooled because the price that the newspapers and television are referring to is the price of West Texas Intermediate crude oil, traded at the New York Mercantile Exchange (where I traded for 25 years).

This financial benchmark has been used to set the price for virtually all of global oil for the past 25 years -- even though there are hundreds of other specific grades of crude oil in the world, extracted from ground, water and stone, and delivered in hundreds of local markets across the globe.

But the market for this one local grade of sweet crude, delivered at Cushing in Oklahoma has dominated the financial world of global oil for so long, it has also come to set the physical prices for real oil virtually everywhere else -- until a few weeks ago. West Texas Intermediate (WTI) has disconnected with crude markets everywhere else and no longer represents the "real" prices of crude, or in other words, the real prices that are being charged at the pump to you and me.

Take a look at some other physical benchmarks and their recent prices: Dubai and Oman sour crude is trading at $99 a barrel, Mars sour -- a U.S. grade from the gulf coast -- has traded at $96, Brent Crude from the North Sea is at $104 and Louisiana Light Sweet, a very similar grade to WTI delivered only 700 miles south in Port Arthur has recently traded at $106! What's fascinating is that WTI has historically been much, much more expensive than ANY one of these other grades.

The reasons that WTI no longer "works" -- at least temporarily -- as a global benchmark is two fold: Physically, Cushing is filled to the brim with supply and because it is small and landlocked, it is difficult to ship incoming crude further south. Financially, the WTI contract has become nothing more than a trading and investing ping-pong ball of asset managers, index investors, ETF's, energy hedge funds and individual traders, all stuck long in a market that won't react positively to Middle East unrest and a general commodity price spike -- a spike that is overtaking every other grade of crude out there.

I outline the mechanisms of all of this in my upcoming book Oil's Endless Bid, but the bottom line is this -- While financial oil may be subject to the whims of big money investors and traders, the gasoline market is far more insulated -- and delivered in New York Harbor where no such physical constraints exist as in Cushing.

So, gas isn't being held back by the WTI disconnect -- its pricing at the pump is a solid 40 cents a gallon higher than the "advertised" price of crude oil that's going out to the world would suggest, up to $3.18 a gallon nationally, according to the Lundberg survey. And this is just the beginning.

As unrest continues to heat up in the Middle East, and as the physical and financial roadblocks to WTI clear up -- as they must -- the financial benchmark at the NYMEX is much more likely to again represent where the rest of global oil is currently pricing -- well above $100 a barrel and indeed closer to $110.

And that means more pain -- much more pain -- at the pump as the summer approaches.