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THREE BUCKS A GALLON??

ACCORDING TO the American Automobile Association, the average price of gasoline around the U.S. has dropped to $2.995/gal.

Shouldn’t the wackos be calling for a Congressional investigation or something? Who’s colluding with whom anyway? (This, of course, is the response whenever gasoline prices move in the other direction.)

Yet, perhaps there’s reason to believe that the world’s petroleum, despite plenty of political complexities, is an excellent model of a relatively free market in action.

Today, the world’s petroleum is pegged at around $80/barrel, having dropped 16.5 percent in the past 12 months. Reasons for this are multifold, but three primary ones are pure economics: The world’s general economic softness has lessened demand compared with projections. Innovative extraction techniques like fracking and horizontal drilling have dramatically increased U.S. production, up by 65 percent since 2010. And, despite political unrest in the Middle East, oil-rich countries there continue to sell crude because they can’t afford to lose out on business.

It has been largely a matter of supply and demand. Data on this are readily available from excellent sources, the U.S. Energy Information Administration (www.eia.gov/petroleum) and its international counterpart, the International Energy Agency (www.iea.org).

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Plus, in marked contrast to the wackos’ saber rattling about petroleum sourcing, U.S. imports of crude have always come from a rational collection of countries. Canada has been in first place, for month after month, year after year. Historically competing for second is our other closest neighbor, Mexico, and Saudi Arabia. (By the way, the U.S., Russia and Saudi Arabia, in that order, are currently the world’s largest producers of oil and natural gas.)

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Whence the crude oil imported into the U.S.? Units are thousands of barrels per day. Data for the week of October 24, 2014. Source: U.S. Energy Information Administration (http://goo.gl/rsbHxS).

Half of U.S. sourcing is typically from the Western Hemisphere. Africa countries are other significant sources, including Nigeria for an interesting reason. Among the world’s crude petroleum, Nigeria’s Sweet Bonny Light is particularly low in sulfur. This has implications in controlling corrosiveness in refinery hardware. Low sulfur is also a necessary characteristic of clean-air fuels, standards for which have become increasingly stringent.

California gasolines are already of lower sulfur content than others in the U.S. They’re also more costly to produce and buy. For example, southern California gasoline prices today are closer to New York City’s $3.37 average than South Carolina’s $2.74.

In any case, U.S. importation of crude has been on a downward trend. See http://goo.gl/dSEk2.

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U.S. imports of crude oil and petroleum products. Source: U.S. Energy Information Administration.

It reached a high in 2005, when more than 60 percent of U.S. oil consumption came from imports. This dropped to 40 percent in 2012. The U.S. Energy Information Administration projects that by next year it may drop to 22 percent, the lowest percentage in 45 years.

Will the U.S. ever have total energy independence? Should this be a goal? Arguments suggest otherwise. Like other political concepts, national security has an economic price.

Will the world price for a barrel of crude continue to go down? Again, economic considerations suggest otherwise. At $70/barrel, for instance, energy producers may be reluctant to invest in high-tech (and high-cost) extraction technology. Supply would diminish, and pricing would react accordingly.

Cheap gasoline has another interesting corollary: Sales of fuel-profligate SUVs tend to rise. Advanced-technology hybrids and other fuel-sipping alternatives are glued to the showroom floor.

This, in turn, generates greater demand for gasoline, and guess what happens to its price?

The next time wackos push for Congressional intervention of those money-grubbing energy producers raising gasoline prices, some thoughts might be addressed to reasons behind our current $3/gal. ds

© Dennis Simanaitis, SimanaitisSays.com, 2014

2 comments on “THREE BUCKS A GALLON??

  1. Spiros Karidis
    November 3, 2014

    Dennis,

    Nice article. Now we only need the wackos to read it.

    Spiros

  2. patrick
    November 3, 2014

    I find it amusing and ridiculous when people expect their politicians to “do something” about fuel prices.

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This entry was posted on November 3, 2014 by in Driving it Today and tagged , , .
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