It is not uncommon to read articles or hear of claims that international oil companies somehow “set” the price of crude oil and use this power to drive profits. But a new report from the U.S. Energy Information Administration (EIA) would, I hope, convince readers otherwise. This online report, called “What Drives Crude Oil Prices?” shows that there are a multitude of factors that influence the price of oil and gasoline – and demonstrates that oil companies simply aren’t able to set prices.
It’s a well-written report that would be useful for anyone interested in learning more about today’s oil markets. But I’ll summarize here.
EIA Report: What Drives Crude Oil Prices?
As the EIA notes, crude is a globally traded commodity. Like any commodity, its price is influenced by changes in supply and demand in both producing and consuming nations, and many of these factors intertwine. For example, EIA points out that higher oil prices might prompt some consumers to buy more fuel-efficient vehicles or use public transportation, which in turn would reduce energy demand.
In its report, EIA organizes crude oil’s influences into several big categories: production (from OPEC and non-OPEC countries), demand (in OECD and non-OECD countries), existing inventories of crude, and financial markets. For example, on the demand side, EIA notes that while oil consumption in the OECD countries declined between 2000 and 2010, non-OECD oil consumption increased more than 40 percent.
These major categories are further detailed in the chart below. While still not exhaustive, it outlines the range of factors — from investments in new supplies to weather to geopolitics to swings in economic activity — that can influence crude prices on a given day, month or year:
Source: U.S. Energy Information Administration
There are two points that I’d like to highlight about this graphic:
1. Like other commodities, the price of crude is influenced not only by today’s market conditions, but also expectations for the future — on everything from economic growth to transportation demand to development of new resources. This point often gets overlooked, and it explains why sometimes, although a market might be well-supplied, prices might still rise — and vice versa.
2. Financial-market factors — such as a weak U.S. dollar and the rising popularity of commodities as an alternative to traditional asset classes like stocks and bonds — can also exert significant influence on crude prices as supply-and-demand changes. EIA examines this subject in more detail in its “Energy and Financial Markets” slideshow, where it notes that the number of open contracts in crude futures has risen fourfold over the past 10 years.
Now some might ask: But what about gasoline prices? Gasoline is just one of the products that can be made from crude, but it is a regular expenditure in most U.S. households. And it is an expense that becomes more significant during difficult economic times as we are seeing now.
As you’ll see in the EIA’s chart below, the main driver of U.S. gasoline prices is the price of crude. In fact, in most cases, the price of gasoline very closely mirrors the price that refiner pay for crude oil.
Much of this is simple economics. Just as bread costs more when grain prices rise, when refiners pay more to buy crude oil, the cost of gasoline goes up. (As the chart shows, sometimes gasoline prices rise faster than crude prices; this is usually at times of temporary bottlenecks in refining, such as after Hurricane Katrina in 2005.)
There’s a lot more information in the report, and throughout the EIA’s website.
As the United States continues to debate its options for addressing its energy and economic challenges, it’s important that citizens and policymakers have the facts they need. For example, if our goal is to keep U.S. energy prices affordable, arbitrarily singling out oil companies for punitive taxes on so-called “excessive” profits would be counterproductive – it will do nothing to reduce pump prices, but would reduce funds available for investment in developing additional the supplies that could put downward pressures on prices. The EIA’s report clarifies important facts that should inform policymaking and dispel the myth that oil companies control gasoline prices.
Wish this could be emailed to Bill O’Reilly
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What would be nice is if the bottom line reason that sets the price in the USA was brought forward clearly. That being:
If you can sell a gallon of gas for $8 to $10 in France; England; Spain; etc., you will “EXPORT” US refined oil to those locations for sale over selling domestically. That is just free market economics.
On the other hand if US Corporate and US Corporate 100% owned “global” oil production was just sold in the US, to keep say a price limit in effect below .60c per gallon then the price of a gallon of gas “in the US” would be about .45c to .60c a gallon and higher elsewhere outside the US.
Countries like Venezuela sells their production at a low price (below .60c a gallon) in their own country first as a benefit to its own people and then “ONLY” surplus oil production is sold elsewhere at a higher price. Hmmmm, maybe that is why the “Big Boys” don’t like Chaves? Just a thought.
Let Bill O’Reily bring up that point.
Given the globalized price theses domestic price differentials are the result of domestic policies toward refining processes and taxes primarily, I suspect.
This article points out the obvious. We need to drill more domesticaly if we wish to have lower prices at the pump. The United States is arguably sitting on top of some of the largest reserves in the world. We need to convince King Obama that it would be good revenue for his U.S. Kingdom.
M J : Obvious is that Exxon Mobil will not commit to there cash flow via technology that is still unproved via auto engines ect.. and I don’t blame them for their caution! Your dealing with a finite resources which is the cheapest at the time of demand at a shortage of supply. Ask Ken about there ventures with China via Refineries or is that another International Oil Corporation I am thinking of these days. Maybe competition SH___!
King of Monarch I wish with Obama but that for sure will not be reality with no opportunties for Obama to gain such wealth in four years unless he owns properties in Canada/oil and tar sands!!!
I dont know about some of you but $21.00 more a week for gas is a lot of money for a lower middle class family. We dont all make $50,000 a year. Also this section only deals with the cost of putting gas in your own vehicle(s). What about the increase of transportation cost due to rising fuel prices? When the price of fuel goes up, so does everything else.
What’s obvious is that US drilling will have ZERO effect on domestic oil and gas prices, relative to world prices, because “as the EIA notes, crude is a globally traded commodity.” Any oil extracted domestically will be added to world supply and traded on the world market. What makes you think Exxon, BP and the rest are going to carve out a special discount price for US consumers just because we drill here?
That is nonsense when we produced oil and lead the world in oil production the price of gasoline was as low as .25 cents per gallon. Its the abundance of supply we suffer now from our own stupidity in curtailing our own oil production. Our economy is now paying the price of this hubris.
Why would any change In supply or demand have “ZERO” effect? What if the supply is substantial? Here we have prejudicial ideology trumping reason (once again…)
Ken: you did post futures and I have a communications about them. I think someone with very large cash reserves/flow could buy and sell crude oil on tanker until ship is ported many time over thus driving up price of crude oil. Now who are these cash cows holding billions of dollars and controlling speculations, why of course Wall Street Elite Investment Firms. Unless OPEC has there hands on applications for speculation control. Maybe Countries and Governments, Religions, Cultures………. maybe not. I communicate to long for you Ken and I am sorry for being a single monopoly on this Perspective of Exxon-Mobil! I talk too much!!!!:O):O)
Bull……When I graduated from colleg in 1973-1974 my first job and taste of reality set in. It was during the first time of long gas lines and unavailability of gasoline. I worked as an engineer at Detroit Edison. They were retrofitting a steam generating boiler to burn crude oil as we were unable to buy or obtain #6 oil. However, we were able to obtain and purchase as much crude oil as we wanted. Here’s the catch: Crude oil is the stuff that’s pumped right out of the earth in it’s pure state. It’s then refined to take out the gasoline, kerosene, Diesel fuel….and of course #6 oil. #6 oil was not available but crude oil was plentiful. In a nutshell, whoever it might be, they were controlling and limiting the refining of crude oil and allowing the demand to skyrocket as the price of gasoline skyrocketed with their scheme. We live in a corrupt society where we’re fed lies on a daily basis. Our inteligence is insulted constantly by politicians, oil companies, etc. Greed is the problem which will eventually eliminate the middle class, which is well… read more »
…underway.
Here’s what I think, you are a transparent lackey for the rich and powerful monopolistic, collusive oil companies, who obfuscates the simple facts about oil prices. Oil companies work together to control oil prices they set the price for oil anytime they please. How many times have we seen the OPEC oil producers reduce oil production to increase the price of oil? Notice when oil prices spike there is never an corresponding increase in oil production as that would have influenced the market to lower prices and that isn’t goanna happen. There are so few oil producers in the world that they enjoy full control of the market price of oil and the demand for oil will only increase as 3rd world countries and China continue to grow, so please don’t treat us like tomatoes.
Tomatoes should be treated as tomatoes.
If we really want to have stable prices for oil that also happen to match the reality of supply and demand, there is only one way to do it: impose a Resource Value Tax on the raw cost of oil BELOW the wellhead, or at least as close as technically possible. Let the oil companies keep all the profit from extraction, refinement, distribution and sales, but tax the full value of the raw commodity according to world market prices, and effectively remove the futures trader from the game.
This would eliminate the wild swings like we saw in 2008 when oil went from a peak of $147/barrel in the summer, to just $35/barrel the following winter. There is simply no way to account for EITHER price by traditional supply/demand metrics (what? Di people suddenly go from heating their homes and driving cars to living in caves and riding bicycles..then back again a few months later?). The price swings of that magnitude are due to speculative manipulation, deliberate or not. That’s what – as the article puts it – a 4X increase in futures volume in 10 years will do to the oil market.
Not only would a proper Resources Value Tax (aka… read more »
…Land Value Tax – where Land is defined in classical economics as ALL natural resources of the universe) eliminate wild swings that make energy planning impossible, it would provide a constant and consistent revenue source to the government, based on value supplied by population demand and nature, and not by anything the producer (Exxon) did. This is fair, just, and sustainable. It rewards production, not speculation (of course, we also need to charge for pollution of the commons, where appropriate).
Since so much revenue would be provided from a RVT, it would be possible to UNTAX ALL RESULTS FROM PRODUCTION: Wages, Sales and Fixed Capital (e.g. buildings, oil wells, etc). This would free up productive potential like nothing we have seen. With other major sensible economic reforms like this, we could grow at 5% a year, non-inflationary, and the debt would become a non-problem.
- Scott Baker, President, Common Ground-NYC / NY Coordinator, Public Banking Institute