Why Abundant Oil Hasn’t Cut Gasoline Prices

For the first time since 1995, the U.S. will likely produce more oil than it imports. That’s great for the country’s trade balance, but the benefits of all that cheap domestic crude still haven’t shown up at the one place it matters most: the gas station. Even as fuel consumption has fallen to 16 percent below its 2007 peak, gasoline remains about a dollar higher than the average price over the past decade. So far this year, gasoline prices have risen 11 percent nationwide, to $3.65 a gallon.

Simple economics suggest that higher supplies and lower demand should translate into cheaper prices. That presumes today’s petroleum markets are simple. Over the last year, the oil boom has upended the long-held belief that U.S. production would inexorably decline while America’s appetite for gasoline continued to rise, leaving the country hopelessy hooked on foreign crude. As the opposite has occurred, regulatory and transportation systems that grew out of those old assumptions have become increasingly outdated, preventing the forces of supply and demand from working efficiently.

Most of the surge in oil production has happened in places such as North Dakota, Wyoming, Colorado, and Oklahoma, far from refining hubs and big population centers. With competition fierce for limited pipeline capacity, producers have begun moving crude on barges and trains, adding as much as $17 a barrel to the price of domestic oil. That extra cost eventually makes its way to the price at the pump. Ethanol requirements have backfired. The idea was to stretch a limited oil supply, cut reliance on imported crude, and make use of abundant corn harvests. But today the ethanol program is raising costs for refiners even as the price of oil has fallen 10 percent over the last year.

Complicating the equation is a 1920 law called the Jones Act, which requires any cargo shipped between U.S. ports to be carried by vessels that are based in the U.S., made in the U.S., and crewed mostly by U.S. citizens. The law was intended to protect U.S. shipping interests but has made it more costly to move fuel between U.S. ports. This in particular hurts the Northeast, which is struggling to meet its fuel needs after several refineries closed in the last two years. According to Ed Morse, chief commodity analyst at Citigroup (C), those constraints add between $6 and $8 a barrel to transport costs. As a result, it’s often cheaper for a Gulf Coast refiner to send gasoline to Brazil than to New York.

In late 2011 the U.S. quietly surpassed Russia as the largest exporter of such refined products as gasoline and diesel. Canada’s fuel imports from the U.S. jumped 15 percent in 2012. Brazil’s demand for U.S.-made fuel rose 6 percent. China’s leapt 17 percent. Exports to Venezuela and India more than doubled. Without realizing it, U.S. drivers are competing for American-made gasoline with consumers in Latin America and Asia, where demand is rising. “Americans don’t think about their prices being impacted by a global market,” says Morse. “The American public just thinks about the rising price at the pump.”

Exports have continued to rise in 2013. In March the U.S. shipped out a record 3.2 million barrels a day of refined fuel. “The tools are in place for the U.S. to become an even bigger exporter of gasoline and diesel,” says Stephen Schork, president of the Pennsylvania energy consulting firm Schork Group. “The U.S. has the most sophisticated network and the most technologically advanced refining system in the world, and it has access to a tremendous amount of domestically produced crude oil in a country where demand is stagnant at best.”

Despite the added costs of transport, U.S. refiners retain a price advantage over their foreign competitors in Europe and Latin America, since U.S. crude is still cheaper than most foreign benchmark blends. This has led to healthy profits for some of the nation’s largest refiners. Shares of Marathon Petroleum (MPC) and Phillips 66 (PSX) hit records in January after earnings beat estimates. Now those lucrative margins have come under pressure as fuel makers run headlong into a biofuel mandate that has become tougher and more expensive to meet.

This year, the law requires U.S. refiners to blend 13.8 billion gallons of ethanol into the fuel they sell to domestic customers. In their calculations when crafting the bill in 2007, lawmakers assumed gasoline demand would continue to rise and that refiners would need all that ethanol to make up 10 percent of the fuel sold to motorists. The problem is that U.S. drivers are consuming less, not more, gasoline because they’re driving fewer miles in increasingly fuel-efficient vehicles. As a result, refiners don’t need all the ethanol the government forces them to buy. To make up the roughly 400 million gallon difference between the ethanol the industry needs and the amount the government mandates, refiners must buy credits called Renewable Identification Numbers, or RINs.

4 Comments on "Why Abundant Oil Hasn’t Cut Gasoline Prices"

Norm on Sun, 31st Mar 2013 11:22 pm 



Look at this title: “Why abundant oil hasn’t cut gasoline prices”.

Oh, OK, oil is abundant now. Can I stop reading right there? Cause that’s what I did.

BillT on Sun, 31st Mar 2013 11:52 pm 



First sentence told me this was a ‘come on’ article to get investors to bet that they can get rich from the shale fields. It is an obvious lie by big oil. I quit reading and went directly to the author. Yep! Advertisement propaganda. Nuff said.

Beery on Mon, 1st Apr 2013 2:27 am 



So-called ‘abundant oil’ has had a significant effect on gasoline prices – it has stopped them from getting much higher. That is a huge deal right now. As soon as the shale oil bubble bursts, the house of cards will come crashing down. And I think we’re probably talking in terms of months, maybe a year, certainly not multiple years.

Plantagenet on Mon, 1st Apr 2013 3:02 am 



Oil is not abundant. Gasoline is not cheap. What part of “peak oil” do you not understand?