A frequent question that has beeen asked in recent months is why the record increases in America’s crude oil production over the last several years haven’t translated into lower prices at the pump for gasoline in the US. A recent BloombergBusinessweek article explains “Why Abundant Oil Hasn’t Cut Gasoline Prices,” here are some edited excerpts:
For the first time since 1995, the U.S. will produce more oil than it imports, but the benefits of all that cheap domestic crude still haven’t shown up at the one place it matters most: the gas station. Even as fuel consumption has fallen to 16 percent below its 2007 peak, gasoline remains a dollar higher than the average price over the past decade.
Simple economics suggest that higher supplies and lower demand should translate into cheaper prices. That presumes today’s petroleum markets are simple. Over the last year, the oil boom has upended the long-held belief that U.S. production would inexorably decline while America’s appetite for gasoline continued to rise, leaving the country hopelessly hooked on foreign crude. As the opposite has occurred, regulatory and transportation systems that grew out of those old assumptions have become increasingly outdated, preventing the forces of supply and demand from working efficiently.
And ethanol requirements have backfired. The idea was to stretch a limited oil supply, cut reliance on imported crude, and make use of abundant corn harvests. But today the ethanol program is raising costs for refiners even as the price of oil has fallen 10 percent over the last year.
U.S. refiners retain a price advantage over their foreign competitors in Europe and Latin America, since U.S. crude is still cheaper than most foreign benchmark blends. This has led to healthy profits for some of the nation’s largest refiners. Now those lucrative margins have come under pressure as fuel makers run headlong into a biofuel mandate that has become tougher and more expensive to meet.
Read More at The American Enterprise Institute . By Mark J. Perry.
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