An article in USA Today noted that gasoline prices are heading back up, and are expected to remain elevated throughout the rest of the year. This will make 2012 the most expensive year for gasoline ever.
Nationally, gasoline prices are averaging around $3.70 per gallon, a sharp jump considering gas retailed for about $3.40 in July, but down from the highs of $4.00 gas in May. This merely reflects ongoing price volatility of crude oil, the main driver of price changes for gasoline.
As ASP noted in its report “Cause and Effect: U.S. Gasoline Prices,” crude oil prices, in turn, are largely driven by events outside of American control. Oil prices are determined by global supply and demand fundamentals, and while changes in U.S. oil production and consumption can influence those figures, the changes are only on the margin. For example, U.S. oil production has soared over the past year, up 12% since the spring of 2011. During that same time, prices have not dropped, but instead have undergone wild swings.
Since the oil market is global and liquid, the U.S. is subjected to forces beyond its control. Therefore, even if we were to become self-sufficient in oil production, we would still be at the mercy of global prices. So, a supply disruption in the Middle East, or rising demand in Asia, will cause prices to rise in rural America.
So, why are prices going up now? Prices have been especially volatile over the last few years because markets are tight – demand is at an all-time high while oil production is shifting to costlier and less stable locations around the world as easy fields naturally decline.
Historically, there has been some level of global spare capacity, concentrated almost entirely in Saudi Arabia. As the world’s “swing producer”, Saudi Arabia could ramp up production in a pinch to satisfy market demand. However, recently, Saudi Arabia’s spare capacity is diminishing as it has decided to operate near full capacity to offset supply outages elsewhere (Libya’s loss of production in 2011, and sanctions on Iran this year). The prospect of conflict with Iran is also putting a price premium on oil. Without much room to maneuver, markets get nervous, which cause speculators to bid up the price.
Acting against higher prices is a weak global economy. The Euro crisis, a tepid American recovery and a Chinese slowdown are keeping oil demand in check. As the economy turns, so do oil prices.
At a more retail level, refining capacity can affect the prices you pay at the pump. Since refining is not enormously profitable, many refineries in the U.S. have shutdown in recent decades. That has made each refinery more important, as an outage at one facility knocks a larger share of refining capacity offline. In recent weeks, as the USA Today article notes, operations at several refineries around the country have been disrupted. A fire at a Chevron refinery near San Francisco has caused gas prices to shoot up over 40 cents in California.
However, crude oil figures are more important over the longer-term. Global oil demand is expected to continue to rise, while production struggles to keep up. Prices at the pump over the next few years will remain volatile because markets are tight.
Political fighting over oil production is a distraction. Oil will continue to be produced because it is profitable to do so, but it is not the answer to our long-term energy problems. The only way to insulate Americans from price swings at the pump is to use less of it. Options to achieve this goal – higher fuel-economy standards, alternative fuels and better mass transit options – should be at the heart of our energy policy debate.