Download What`s Driving Gasoline Prices? Ran as

What’s Driving Gasoline Prices?
Ran as “World demand, not U.S. politics, controls gas prices,”
March 30, 2012
William W. Wade, Ph. D.1
The President has no more control over the price of gasoline than the price of gold or
copper, corn, or any commodity. Claims by Republicans that they will bring down the
price of gasoline are campaign nonsense that make me wonder if they are ignorant or
just hope we are. Markets set the price, not politicians.
US crude oil production is the highest since 2003, up 10 percent since President
Obama took office and projected to rise another 15 percent by 2020. If “drill baby drill”
is your mantra, then praise the Obama Administration. Oil wells drilling in mid-March
are up to 1,317 rigs from just under 200 in 2009 when President Obama took office. US
crude oil production in February rose to the highest level since 2003. North Dakota
produced record levels of Bakken crude oil in January -- 546 thousand barrels per day
(MBD), heading to 750 MBD by mid-decade. Dependence on foreign oil has declined
900 MBD since 2008.
So, with domestic crude oil supplies rising, why are gasoline prices rising? The price of
gasoline no longer necessarily follows the price of crude oil as it mostly has in the past.
The world market is changing.
The US recession, high fuel prices, increasing transportation fuel efficiency, and
blended biofuels have reduced refined gasoline usage during the first quarter 2012 to
the lowest level since 2001. From the 2007 peak in gasoline demand, domestic usage
is down ~ 1.0 million barrels per day in 2012.
With domestic crude supplies on the rise and US gasoline demand down, why are
gasoline prices rising? Average US price for regular gasoline is up 35 percent over the
average of prices for the last five years. News media report that speculators, not
market fundamentals, are driving-up the price. Partly true; futures contracts for NY
reformulated gasoline thru mid-March are $0.50 a gallon higher than this time last year
and $1.00 higher than 2010. Wall Street speculators are betting that turmoil in the
Middle East gets worse.
1
The author is a resource economist, working in Columbia TN. Most recent energy publication is "The
Keystone XL Pipeline: REMI Estimates of Economic Impacts from Construction and Operations,"
February 29, 2012. <[email protected]>
Tensions in the Middle East mask the fundamental change occurring in world
transportation fuel markets. Increasingly, transportation fuel prices are set on the world
market, not the US market. While demand languishes in the US, gasoline demand is
escalating in India and China. US refining capacity is expected to be static the rest of
this decade while capacity in India and China will increase by 8 million barrels per day.
US demands are sharply below US Gulf Coast refining capacity; but gasoline exports
have increased 250 percent since 2009. For the first time in over 60 years,
transportation fuel is the number one US export. Hence, the world market sets the
price. The East Coast market imports gasoline from the rest of the world. East Coast
and Caribbean refinery closures in recent months and capacity limitations on the
Colonial product pipeline from the Gulf Coast to the East Coast assure that gasoline
prices will remain tied to the world market.
The fast-tracked Keystone XL pipeline segment from Cushing OK to the Gulf Coast will
not reduce gasoline prices. This crude oil line will eliminate a bottleneck of American
and Canadian crude supplies in the Midwest trying to get to Gulf Coast refineries.
These crudes may replace Middle East imports, but will not affect the US price of
gasoline.
Bottomline: Rising world demand for gasoline has become the fundamental economic
driver of gasoline prices. Tensions arising from Iran have a magnifying effect.
Administration policies might reduce Middle East tensions, but cannot slow the growth
of gasoline demand in China.
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