Cramer: Why Aren’t Prices at the Pump 20% Lower?

(Click for a searchable transcript of this Mad Money segment)

Tired of sky high prices at the pump. So's Cramer.

According to the Mad Money host, they should be significantly lower, at least here in the US.

But the issue isn't nasty oil companies gouging the little guy. The issue isn't even a burst of violence in the Mideast. Instead, high prices at the pump are a result of a faulty market mechanism.

"The worldwide market for oil is priced off of Brent crude. And right now the price is absurdly high; yet it controls the entire market," Cramer said.

Brent is dominant in Europe and it's also used in parts of Africa and Asia. Because it's so widely used, it's become the global benchmark. That is, markets believe demand for Brent more accurately reflects the global oil picture than demand for any other type of oil including WTI or West Texas Intermediate.

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For many years Brent and WTI traded in a tight range, but recently they've started to diverge with Brent trading much higher.

"That's because the price of Brent is set off the rapidly declining oil fields in the North Sea," Cramer explained. "Those fields have been generating oil since the 1960's."

In other words, because supply of Brent may be dwindling, the price is stubbornly high.

"Therefore the price you pay at the pump isn't being set by a worldwide market; it's really being set by one field's diminishing output," said Cramer.

And that's not fair.

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Instead Cramer believes the US needs to implement a strategy to harvest our nation's newly discovered energy deposits. Were that to happen, "the price of crude produced in North America would be set here," Cramer insisted.

"And it would probably be $20 lower than the price of Brent. That would mean that the price you pay for gasoline would be 20% lower," he said.

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