Simanaitis Says

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CHEAP GAS—THE LATEST INFO

RARELY HAS gasoline in the U.S. been so cheap. So where are all those Congressional committees yammering about conspiracies? The fact is, if you seek a modern economic model of supply and demand, look no further than gasoline. I’ve noted this before back in November 2014. And it’s true today, even if parameters have shifted a bit.

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Image from “Oil Prices Explained: Signs of a Modest Revival, The New York Times, May 20, 2016. Photo by Michael Stravato for The New York Times.

“Oil Prices Explained: Signs of a Modest Revival,” by Clifford Krauss, in The New York Times, May 26, 2016, discusses many aspects of this. My own research adds to the tidbits offered here.

The current U.S. national average gasoline price is $2.32/gal. for regular and $2.79 for premium. California Reformulated Gasoline Phase 3 blends cost a bit more; currently California’s regular goes for about the price of premium nationally.

The U.S. Department of Labor’s CPI Inflation Calculator shows what a bargain gasoline is. Today’s $2.32 had the buying power of $1.95 ten years ago. By contrast, a gallon of regular actually cost $2.90 on April 23, 2006. And things got dramatically worse during the economic meltdown of 2007 – 2008.

In July 2008, several extremes were reached: Gasoline peaked at a national average of $3.60/gal. (Think $4/gal. in today’s dollars.) California prices approached $5/gal. back then and folks in Western Alaska saw it briefly touch $8/gal.

Another anomaly of the world’s economic crisis was the price of crude reaching an all-time high of $140/barrel in July 2008. Today, crude made the news when it hit $50/bbl; it got as low as $26.21/bbl in February of this year.

Even in the mixed economies of today’s world, supply and demand remains a meaningful concept. Higher supply pushes price down; more demand elevates it, whether it’s theater popcorn or Gucci bags.

Consider supply and demand of gasoline, 10 years ago versus today: Cars of all sorts, everything from exotics to plug-in hybrids, are more efficient and use less fuel. Society has responded to government regulations and environmental issues. Note, for example, no longer is the Sunday afternoon drive considered a routine family activity. These trends have reduced demand for gasoline, even with increased numbers of cars and trucks.

The supply side has evolved as well. United States domestic production nearly doubled over the past several years. Technological advances such as fracking and horizontal drilling make existing wells more productive. Since May 2011, the U.S. has been a net exporter of refined petroleum products. In 2014, it was third in the world among exporters of crude; only Saudi Arabia and Russia exceeded this.

Political changes in the world have effects on supply too. With many of Iran’s trade sanctions lifted, this country has increased its exports of petroleum, much to the consternation of fellow OPEC member Saudi Arabia. Oil policy isn’t the only reason for their animosities: Saudi Arabia is a Sunni Islamic Kingdom; Iran is a Shia Islamic Republic. Each wishes to dominate the region.

Over the years, the U.S. banned importation of Iranian petroleum. On the other hand, suppliers of crude to the U.S. exemplify an optimized variety of eggs in an economically rational basket.

For year after year, the largest petroleum supplier to the U.S. has been its neighbor Canada. Its other neighbor, Mexico, is invariably in the top five. Data from February 2016 are typical:  Canada accounted for 42 percent of U.S. crude imports; those from the Western Hemisphere totaled 63 percent of the total.

Saudi Arabia is invariably second or third in the list, with 10 percent of the total in these current data. The entire Persian Gulf accounted for 16 percent of U.S. crude imports; OPEC members, 32 percent.

Reasons for this distribution aren’t simply political, nor geographic. The quality of crude is important. Crude oil from the Caribbean basin is generally high in sulfur and requires additional refining technology. Nigerian crude is especially sweet and considered a premium product.

What of the future?

In “Oil Prices Explained: Signs of a Modest Revival,” Clifford Krauss addresses much of this from a business perspective of the oil industry—which is currently hurting. Or at least it’s hurting relative to its record profits made in recent years. Cutbacks and weeding out of weak players will affect supply. A trend of increased car travel may increase demand.

Petroleum remains a finite resource. And combustion of any sort has environmental consequences. Have you ever been near a steam locomotive? Not to destroy the nostalgia, but that’s not only steam, those are hot cinders.

Yet, even with governments trying to enhance the common weal, gasoline pricing will continue to be determined largely by the exercise of supply and demand. ds

© Dennis Simanaitis, SimanaitisSays.com, 2016

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