Given America's new oil rush, it would seem the best of times for gas
prices. But with $4-per-gallon sticker shock, it might feel like the
worst of times.
How can this be?
The question is all the more perplexing, because the United States is not only producing more crude oil but also using less of it. As a result, net oil imports have dropped a third since 2005.
With
such good fortune, America's soaring pump prices seem to defy the laws
of supply and demand — except for one fact: It's increasingly not just
about us.
U.S.
gas prices are largely determined by global crude oil prices, which
depend on a widening and shifting array of factors half a world away:
economic sanctions on Iran; deepwater drilling off Brazil; spare oil
capacity in Saudi Arabia; auto use in China; less nuclear power in Japan.
So oil rigs may be hopping in North Dakota, but what happens in the Strait of Hormuz
will likely have more impact on prices at the local gas station — even
though the U.S. doesn't import a single gallon from Iran.
"The
market for oil is global," says Neelesh Nerurkar of the Congressional
Research Service, the research arm of Congress, who co-wrote a paper on
2012's rising gas prices. He says although the U.S. imported almost no
oil from Libya, unrest there last year cut the world's crude oil supply
and thus drove up gas prices here.
"It's frustrating to everybody," says Howard Gruenspecht, acting administrator of the U.S. Energy Information Administration,
referring to the U.S.' limited ability to control its own gas prices
despite its oil boom. His agency says the U.S. increased production of
oil and petroleum products about 20% since 2008, but the amount was
only 11% of the world's supply last year and 53% of what the nation
used.
Federal laws do not generally allow
crude oil that's produced in the U.S. to be exported but permit the
export of refined products that come from it — such as gasoline, diesel
and jet fuel. Last year, for the first time since 1949, the U.S. became
a net exporter of these products. Most gasoline exports go from Gulf
Coast refineries to Latin America, where demand is booming.
"They're not keeping it just for us," President Obama
said this month about U.S. oil companies, noting they sell on the
international market. As a result, he said, "We can't just drill our
way out of this problem."
He argued the only
true solution to high gas prices is independence from fossil fuels,
adding: "I don't want our kids to be held hostage to events on the
other side of the world."
His likely GOP presidential opponent, former Massachusetts governor Mitt Romney,
partly blames Obama for gas prices, saying he should do more to expand
U.S. oil production and pipeline capacity. When Obama was running for
president in 2008, he partly blamed then-president George Bush for that year's surge in gas prices.
"The
reality is that presidents have very little to do with near-term
fluctuations in gasoline prices," Frank Verrastro, director of the
energy program at the Center for Strategic and International Studies,
told a U.S. Senate panel last month.
Here's a look at five factors that do:
1. Global crude oil price increases.
Crude
oil accounted for nearly three-quarters, or 72%, of the retail cost of
a gallon of gasoline in February, according to the most recent data
from the U.S. Energy Information Administration, the analytical arm of
the Department of Energy. Refining costs/profits accounted for 12%, federal/state taxes for 11% and distribution/marketing for 5%.
Crude oil prices reflect the cost of production, which has become more challenging as easy-to-access reserves dwindle.
"Oil companies are turning to increasingly costly-to-produce oil," says Michael T. Klare, author of The Race For What's Left: The Global Scramble for the World's Last Resources.
He points to tar sands in Canada, deepwater reserves off Brazil or
so-called tight oil that's extracted from shale formations by hydraulic
fracturing in the U.S.
Klare says oil prices
also reflect both the world's current supply and demand as well as
expectations about the future. "People are bidding against each other
and driving up the price," he says, noting buyers pay now for delivery
later, so they often hedge their bets to account for a potential loss
in supply.
2. Iran and other geopolitical uncertainties.
What's
causing the most heartburn now is Iran, one of the world's top five oil
producers (along with Saudi Arabia, Russia, the U.S. and China).
"This
year, the dominant factor in pushing up world oil prices — and thus
gasoline prices in the United States — is geopolitics — specifically,
rising tension over Iran," Daniel Yergin, chairman of the IHS CERA
division, formerly known as Cambridge Energy Research Associates, recently told a Senate panel.
Because of concern that Iran is developing nuclear weapons that could strike Israel, the U.S. and the European Union
have imposed economic sanctions against it and are considering tougher
measures. Iran has threatened to "close" the 6-mile-wide Strait of
Hormuz, a major oil thoroughfare, but has also agreed to talks with six
major world powers, including the U.S.
Other uncertainties focus on civil unrest in Yemen and Syria and discord between Sudan and South Sudan.
3. Limited spare capacity.
These
countries worry the oil industry, even though they're not major oil
producers, because there's limited global cushion to cover a loss in
production should their conflicts spread or deepen.
Right
now, Saudi Arabia holds almost all the world's spare capacity in crude
oil production — estimated at about 2 million barrels a day, which is
low historically and less than Iran's daily exports.
"We're
on a cusp, a balancing point," says Martin Tallett of EnSys Energy, an
industry consulting firm. He says less than 4 million barrels-per-day
of spare capacity is problematic, because even small changes in supply
or demand can swing prices. "We're in a period of quite high
uncertainty."
The U.S. also has 696 million
barrels in its Strategic Petroleum Reserve, designed as an emergency
stockpile, but its prior releases lowered gas prices only temporarily.
The reserve can satisfy a tiny fraction of the world's oil demand,
estimated at 89 million barrels-per-day this year.
4. Rising worldwide demand.
Oil
consumption in the U.S. has fallen 10% since 2005, back to 1998 levels,
as Americans drive less and use more fuel-efficient cars and equipment.
That's
not the case worldwide. From 2008 to 2011, oil demand grew by 3.2
million barrels per day from just four countries — Brazil, India, China
and Saudi Arabia — and isn't expected to slow much this year, according
to U.S. Senate testimony by Paul Horsnell, head of commodities research
for Barclays.
Japan's demand for oil has also increased since a massive earthquake and tsunami in March 2011 caused partial meltdowns at its Fukushima Dai-ichi nuclear power plant. Of its 54 nuclear reactors, only one is now operational.
"Demand is rising worldwide, even if it's not in the United States, and supply is not keeping pace," Klare says.
5. Refinery closures/production costs.
Higher demand could trigger particularly higher gas prices along the East Coast
where several oil refineries have closed in recent years, making the
region dependent on gasoline imports. Refinery outages on the West Coast have recently pushed up prices there.
Unlike
refineries on the Gulf Coast, which are sophisticated and have great
export opportunities, those on the East Coast tend to be less flexible
in the crudes they can refine and face more global competition.
Sunoco closed its Marcus Hook,
Pa., refinery in December and may close (or sell) its Philadelphia one
this year, while ConocoPhillips shuttered its Trainer, Pa., refinery
last September. These three facilities account for half of the
Northeast's refining capacity.
Another issue
is pipeline capacity, which also varies nationwide and contributes to
the regional differences in gas prices. Verrastro, an energy analyst,
says expanding capacity with the Oklahoma-to-Texas half of the proposed
Keystone pipeline could temporarily hike gas prices in the Rocky
Mountain area by relieving the current glut of oil that has depressed
gas prices there.
Where are gas prices
headed? Some industry analysts say prices have already peaked this
year. Gruenspecht's EIA predicted April 10 that regular-grade gas
prices will average $3.95 a gallon through September and could peak at
$4.01 in May. It forecasts slightly lower gas prices next year of $3.73
a gallon.
"Our outlook is for prices staying
fairly high," Gruenspecht says, adding: "but there's a fair range of
uncertainty around that."