After being identical for most of history, the cost of crude oil among the Department of Energy's five Petroleum Administration Defense Districts (PADDs) has diverged widely over the past year. This accounts for the current spread in gas prices, where a gallon is approaching $4 in Wyoming and Montana but is nearing $5 in California. As the Energy Information Administration reports this week, "Historically, there has been little variation across regions. From 2004 through 2009, the average of the annual spread between the most expensive and least expensive regional refiner acquisition cost was $5.52 per barrel. In 2010, the spread was $7.46 per barrel, and in 2011, it widened dramatically to $23.78 per barrel.”
The main factor is that the Midwest is supplied from domestic sources whereas the East and West Coasts rely largely on imports. In recent years West Texas Intermediate, the benchmark for domestic crude, has been higher than North Sea Brent, the established price on the international market. This was because WTI was considered a slightly higher grade. But the surge in production from the Bakken Shale plus rail imports from Canadian tar sands have all converged on Cushing, Oklahoma, the "Pipelines Crossroads of the World" creating a large glut at its refineries. As the IEA says, “It is much more difficult to move crude out of the Midwest than into it. Most pipelines connecting the Midwest to the rest of North America, including the new Keystone system, run towards the Midwest, not away from it” The result has been that over the last two years the WTI price has fallen almost 20 percent below Brent crude, a reversal of the historical pattern.
While some market factor might be expected to compensate, another insidious pattern is likely to make things worse. As the price of crude increases, refineries find it more difficult to make a profit. Thus, while refineries are thriving in the Midwest, two near Philadelphia are closing because they were suffering such heavy losses. This will increase retail gas prices on the East Coast even more. The situation is now being corrected to some degree. One pipeline is now being reversed to carry oil out of Cushing into Texas to relieve the bottneck and construction of the southern half of the Keystone Pipeline may help as well. Until then, the price differential is likely to persist.