The truth about gasoline prices (and why politicians are liars)

If you've been listening to lying politicians and their grand plans to lower the price you pay at the pump I have one piece of advice for you: Stop Listening! This issue drives me nuts, because it seems to be an issue that politicians love to lie about yet nobody calls their b.s. When politicians who label themselves as Conservatives are asked what the government can do to lower gasoline prices, you think they would throw in something about CONSERVING (the name play is a little ironic no?), but nope, all we hear about is how the U.S. just needs to drill more and we would pay lower at the pump. Well I'm hear to tell you that's a lie, and here's why.

First, let me get this out of the way: I'm not against more domestic drilling. I'd rather oil be drilled for here than in Saudi Arabia, Iran, Nigeria, Venezuela, etc. Drilling more in the U.S. strengthens our security and puts more money in the U.S. economy. What I am against is politicians claiming that more domestic drilling will have any measurable effect on gasoline prices for U.S. consumers.

The breakdown shown at the top of the post is provided by the U.S. Energy Information Administration. It shows that 76% of the price of gasoline is from the price of crude oil, and as Ken Cohen - vice president of public and government affairs for Exxon Mobil Corporation - stated in his blog post "What's up with U.S. gasoline prices?":

Crude oil is one of a number of globally traded commodities like gold, corn, coffee and many others. The prices of such commodities are set in worldwide markets comprised of buyers and sellers reacting to economic fundamentals and perceptions of supply and demand for each commodity. This means that the price of consumer products based on those commodities – whether it is gasoline or a can of coffee – will fluctuate based on global commodity prices.

So 76% of the price of gasoline is set by commodity traders on a global market. Politicians claim that more U.S. drilling would somehow lower the price of oil that is set on the world market, but I have yet to see a study to prove this. The only study I have seen that has put a price on increased U.S. drilling (which I mentioned in our post How we can pay less for gas) was a study produced by the Energy Information Administration about opening up ANWR to oil drilling which stated:

Additional oil production resulting from the opening of ANWR would be only a small portion of total world oil production, and would likely be offset in part by somewhat lower production outside the United States. The opening of ANWR is projected to have its largest oil price reduction impacts as follows: a reduction in low-sulfur, light crude oil prices of $0.41 per barrel (2006 dollars) in 2026 for the low oil resource case, $0.75 per barrel in 2025 for the mean oil resource case, and $1.44 per barrel in 2027 for the high oil resource case, relative to the reference case.

Let's assume that in 2027 the price of a barrel of oil is $144. Assuming that the percentages shown at the top of the post are the same in 2027, and we take the best available estimate provided by the EIA, then if oil prices are reduced by $1.44 (or 1% of what the assumed price of oil would be) than the price of gasoline will drop by .76%. That is LESS THAN 1%!

So the next time a politician spouts some dumb line that drilling more in the U.S. will lower gas prices for U.S. consumers, tell him that the only study you know of that has looked at this shows that more U.S. drilling would lower gas prices by less than 1% in about 15 years.

Do you know what would have a greater affect on the price of gasoline? More conservation and more efficient vehicles. If U.S. consumers drive less and drive more efficient cars, than the commodity traders will realize there is going to be less demand for oil and the price of oil on the futures markets wont be bloated. The great news is you don't have to wait for a politician to suggest this. You can do it now.

Comments

Anonymous (not verified) Mon, 03/12/2012 - 09:48

Good sense if the crude market were the only supply that matters. The gas supply has a substantial impact and is manipulated by the refiners to some extent to keep prices as profitable as possible. Currently I believe there is an excess of gasoline that is exported to markets where there is a better price. It is cheaper to ship to other markets than to ship to the east coast which refines more expensive Brent crude because of a lack of pipeline infrastructure to the east. Gas in the central states on the other hand is cheaper because it is refined from cheaper crude supplies.. So by keeping the gas here, we could lower prices immediately at least in certain parts of the country. Increasing the margin for commodity traders would also have a significant impactLN5A

Anonymous (not verified) Tue, 03/13/2012 - 01:38

"Gas in the central states on the other hand is cheaper because it is refined from cheaper crude supplies.." Exactly, domestic and Canadian tar sands surpluses drive the costs down because the oil cannot be shipped down to the gulf refineries to be sold overseas. Keystone would change that, resulting in higher prices in those areas. One thing you can do now to help lower the price of oil is conserve, or just switch to an electric car. I have put 5600 miles on my Volt since June 2011, and have not yet bought any gas for it. Since my electricity is generated by my solar panels, I have not had to pay for the electricity either.

Anonymous (not verified) Tue, 03/13/2012 - 01:07

Steve. This is just good business sense by the gas companies. Of course they will try to control supplies and export excess gasoline at higher prices where possible. Are they going to voluntarily lower their profits just for our sake? Politicians have no impact on this either..... Unless you think they can VFpass laws making it illegal to export gasoline.

Anonymous (not verified) Tue, 03/13/2012 - 03:17

Steve, That is a great explanation of differential regional pricing. And except for the fact that oil is fungible, and price per barrel is based on pricing in the global market, it's completely believable. Which would make markets more indifferent to source location and explain why Brent crude's pricing does not lock it out of the East Coast markets.

ckmapawatt Tue, 03/13/2012 - 08:35

That's awesome. I'm going to write a post sometime in the next few weeks about the Volt's sluggish sales. I think GM needs to revamp marketing for the vehicle with more stories from owners like you.

Anonymous (not verified) Wed, 03/14/2012 - 22:17

The one study I would love to see the results of is the correlation of the "banks" actually investment banks that had to be bailed out were linked to oil trading futures rather than real assets.

ckmapawatt Thu, 03/15/2012 - 07:20

Hmmmm.....I'm guessing that answer would be all of them. I'm sure every investemnt banks is trading in oil futures in some form or fashion.

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