When the price of gasoline increases, so do the misplaced theories that some commentators use to explain the phenomenon.
Some, including Fox’s Bill O’Reilly, have charged large integrated oil companies with manipulating the price of gasoline by purposefully taking gasoline and diesel out of the U.S. market. This has led to calls for Congress to raise export taxes on oil companies to keep gasoline and diesel in the United States.
I recently explained why this analysis is wrong. Gasoline prices are determined largely by crude oil prices, which are set in a global market by buyers and sellers reacting to a variety of supply and demand factors. U.S. exports of refined petroleum products such as gasoline and diesel are not to blame for prices at the pump because U.S. markets actually are well supplied for these fuels. In fact, gasoline demand in the United States has dropped in recent years.
Now along comes independent verification of those claims from the U.S. Energy Information Administration (EIA) – which recently announced: “Record gasoline exports do not appear to be driving gasoline prices.”
The EIA’s study examines the many factors in determining gasoline prices around the country. It’s well worth reading to appreciate the nuances of petroleum markets, particularly why American energy producers export refined petroleum products – primarily more diesel fuel than gasoline – to markets in other parts of the world.
The EIA also points out that not only do we export petroleum products, we import them too. In fact, East Coast markets traditionally import large amounts of gasoline from Europe as a more economical solution to meeting local transportation needs than relying on supplies shipped from the Gulf Coast. This is due in part to pipeline capacity limitations and domestic shipping constraints that make gasoline imports more competitive than Gulf Coast supplies. That’s an interesting bit of perspective largely absent from most commentary about exports and gasoline prices.
Finally, the EIA notes that “growth in U.S. gasoline exports does not itself translate into higher prices for U.S. consumers. Rather, export markets are providing an outlet for refiners who would otherwise have faced margins that incentivized run cuts, or possibly even shutdowns, as decreased domestic demand had created excess refining capacity.”
How does this work? Many Gulf Coast refiners are responding to the strong global demand for distillates by maximizing production of diesel fuel. They therefore buy and refine more barrels of oil than they would without that market demand for diesel. U.S. refiners can only get so much distillate from a barrel of crude oil – roughly 11 gallons out of a typical 42-gallon barrel, according to EIA data. Every barrel also yields about 19 gallons of gasoline. So when refiners process extra barrels in an attempt to help meet diesel fuel sales in the U.S. and overseas, they are coproducing extra gallons of gasoline. And given the American market is already well supplied with gasoline, that extra production helps put downward pressure on prices in the United States.
That’s good news for American consumers. It turns out that exports of refined products are keeping U.S. markets better supplied with gasoline and other fuels than if politicians acted on suggestions to limit that trade.
In February the Obama administration reported to Congress that “the growth of U.S. exports over the past year has been a particular bright spot” in the economy, making special note of the role petroleum product exports have played. It’s a shame not everyone has gotten that news.