High gasoline prices: Three reasons

imagesCAEB04GKYou would think that the unprecedented surge of new oil production in the United States would have the effect of lowering the price of gasoline at the pump. This would seem logical since the imported oil backed out is largely bought by refiners at the world (Brent) price while our domestic production in Texas, North Dakota, etc. is bought at the West Texas Intermediate (WTI) prices, which is now about $ 20/barrel lower than Brent oil.  Moreover, U.S. gasoline consumption is actually declining, as fuel economy has been Gasolineimproving, so you would think that gasoline would be a buyer’s market.

So, what’s going on? Well, there are three  reasons why gasoline prices are not declining, except when the economy goes into a tailspin(See also Bloomberg Business News April 1-7, 2013 from which the graph was reproduced here): (a) we are exporting huge amounts of gasoline and other fuels to regions where energy prices and demand are high , (b) refiners are paying a great deal of money for corn-based ethanol that must be blended into gasoline by government Clean Air Act mandate to reduce smog, and (c) the logistics of getting “cheap” domestic crude oil to refineries are unfavorable, making the crude effectively more expensive, as further discussed below. The laws of supply and demand are inexorable and in this case they are actually working against us.

The U.S. has always exported a certain amount of refined fuel products, particularly diesel oil to countries that use much more of this fuel than we do.  But over the last few years, gasoline demand in China, India, Mexico and South America has been rising rapidly, making these regions a desirable export market for us. So, drivers here are actually competing with drivers in other countries for our gasoline.

Secondly, with high corn prices, “gasohol” (ethanol)  is much more expensive to produce. Also, the government fuel mandate forces refiners to buy a certain amount of ethanol annually and if it cannot all be blended into gasoline (lower gasoline demand, a limit to how much ethanol gasoline can contain) refiners have to buy ethanol “credits”, the cost of which is passed on in the price at the pump.

As to crude shipping logistics from wellhead to refiners, there is limited pipeline capacity, for example, from North Dakota (where more and more oil is being produced) to refineries that want to buy this oil, causing some oil to be shipped by rail and tank truck (!)  Also, Gulf Coast crude oil bought by refineries on the East or West Coast must be shipped in U.S. flag tankers, as mandated by the so-called Jones Act, which, due to higher U.S. labor rates makes shipping cost more expensive.

So, don’t expect gasoline prices to fall sharply any time soon.

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