Petroleum Paradox Explained: Why Crude Prices Are Dropping And Gasoline Prices Rising In The Wake Of Harvey

Oil prices are dropping and gasoline prices are rising because of Tropical Storm Harvey’s impact on Texas, when the two usually move in concert.

Why the dramatic divergence?

Harvey knocked out half the oil-refining capacity in Texas, which converts 30 percent of the nation’s crude, LPL Financial said in a new report. Texas refines the most oil of any state with an average of about 5.5 million barrels per day, the equivalent to about 30 percent of the nation’s refining capacity.

Oil prices have actually fallen because most of the damage hit the coastal Texas and Louisiana areas, where much of the refining operations are concentrated.

The result, the report said, is a surplus of crude in storage, depressing prices with the lessening demand for unrefined petroleum.

Meanwhile, At The Pump...

On the opposite end of the system, the drop in output of refined gasoline and diesel is driving those prices higher. So while gas and oil prices generally move in tandem, they now have “diverged considerably,” the report said.

The dramatic split in the two can be seen in the graph below:

With one-half of refining capacity (14 percent of the nation’s refining ability) offline, it’s likely to go higher once the hurricane finishes with Louisiana, which process 3.4 million barrels of crude per day, about 18 percent of the nation’s total. Thus far, there have been no reports of Louisiana refineries shutting down.

"We have already seen the impact on the price of gasoline on a national level,” Matthew Peterson, chief wealth strategist for LPL Financial, was quoted as saying in the report.

“Until Harvey has moved on, and refineries release more data regarding shutdowns and how long it will take them to restart operations, we would expect higher prices at the pump in most places–which likely means more volatility in the crude oil market,” he added.

Related link:

How Will Harvey Impact Oil and Gas Prices?