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Why are gas prices so high?

Rosemary Joyce, professor of anthropology | October 16, 2012

The second presidential debate is over. The spinning is going strong. Almost all the journalism seems to be about the contest.

And that is too bad, because at a few points, there were actual issues raised that might be worth following through.

For example: Republican candidate Mitt Romney argued that a president should be judged on whether gas prices come down while he is in office. His specific attack on President Obama was based on the rise in gas prices from when Barack Obama was elected to now– when they have topped out over $4 nationally, and around $5 in some parts of California (where recent news reports say they are slowly beginning to decline).

A blogger on the Christian Science Monitor provided an analysis of forces affecting gas prices in September. You may be surprised at their lead:

Drivers in North America are now competing with the rest of the world for cheap American crude oil.

Read that again. Carefully this time. Drivers in North America — including in the US — are competing for cheap American crude oil.

Meaning: crude oil from the US.


Crude oil is not all used for gasoline. So the story starts with a higher global demand for the other products of refining crude oil. World wide, the CSM article argues, demand for products like diesel, jet fuel, and home heating oil are higher.

And that market force — demand from outside the US — has the globally oriented oil companies in the US exporting products outside the country:

US refineries are dramatically increasing their exports of light/middle distillates from the Gulf refinery complex out into the rest of the world.

A chart accompanying the CSM article (also in the original blog post) shows dramatic increases in exports of US Gulf oil products outside North America, with exports of gasoline roughly quadrupling since 2008, and exports of other crude oil products approximately tripling.

This move to export is fueled (pardon the pun) by a price difference between two kinds of oil: West Texas Intermediate oil, and Brent Crude, which comes from the North Sea:

Refineries export into a global market for their refined products, which are all priced on Brent Crude, while their input costs—North American crude oil—is priced on cheaper WTI, or West Texas Intermediate….That $15/barrel price difference between the Brent and WTI is pure profit for refineries. (emphasis added)

Buy low, sell high. And the market that will pay the higher price is overseas.

Candidate Romney implied that gas prices are high today because US supply is low. But actually, according to this specialist, the reverse is true:

The WTI price is so much cheaper because of the HUGE supply of new oil created by the U.S. in the fast-growing Shale Revolution.

Don’t believe that domestic oil supplies are rising?

Take the time to carefully read this, from an article in the New York Times in March of this year:

Across the country, the oil and gas industry is vastly increasing production, reversing two decades of decline…. the industry is extracting millions of barrels more a week, from the deepest waters of the Gulf of Mexico to the prairies of North Dakota….At the same time, Americans are pumping significantly less gasoline….In 2011, the country imported just 45 percent of the liquid fuels it used, down from a record high of 60 percent in 2005…. Not only has the United States reduced oil imports from members of the Organization of the Petroleum Exporting Countries by more than 20 percent in the last three years, it has become a net exporter of refined petroleum products like gasoline for the first time since the Truman presidency….National oil production, which declined steadily to 4.95 million barrels a day in 2008 from 9.6 million in 1970, has risen over the last four years to nearly 5.7 million barrels a day.

Done with your homework?

If you understand all of this, then the question is: can a US president control the growth of world-wide demand for oil products? Can a US president erase the price differential that makes it vastly more profitable to sell US gas outside of the US?

If so, then hold presidents accountable for the price of gas. But remember: virtually everything Mitt Romney said he would do, Barack Obama is already doing.

In the case of the Keystone XL pipeline — where the Obama administration delayed approval of the northern segment, but has allowed construction to begin on the southern end of the pipeline — be careful what you wish for: in May,  Bloomberg News reported on an analysis showing that the pipeline might actually increase US gas prices.

Why? because the Keystone Pipeline project is likely to produce gas for export– not for consumption in the US. Businessweek found that even making a very optimistic assumption that a large part of the oil from the pipeline would be consumed in the US, the impact that could be expected on US prices would be minuscule.

All of this is missing context for candidate Romney’s claim that if he were president, gas prices would come down: the president of the US is not actually the head of the world economy. US production is already up, but unless the republican candidate is thinking of nationalizing the multinational oil companies, they will continue to seek the highest profit possible from the sale of their products. And right now, that means sending US oil out of the country, not reducing the price of oil in the US.