What’s Driving Global Gas Prices?
There’s a lot to keep an eye on as a driver - the road, your mirrors, your speedometer… and, of course, the price of gasoline. This is the second post in a three part series on what’s driving gas prices, and how you can save at the pump.
In our last post, we talked about how seasonal factors like increased demand and the switch to summer blend gasoline combine to push gas prices higher in the spring and summer than at other times of year.
But gas prices vary even more dramatically over years and decades, as we can see in the graph below. Why do prices rise and fall so dramatically over time, and can we ever expect a return to lower gas prices?
Screenshot from the U.S. Energy Information Administration Real Prices Viewer, May 2014
To answer these questions, we need to find out what affects the price of crude oil. The cost of crude oil accounts for 67% of what you pay at the pump, compared to just 12% for refining, 9% for distributing and marketing, and 12% in taxes.
Demand and Prices Rise and Fall with Economic Growth
According to the U.S. Energy Information Administration (EIA), world economic growth is the biggest factor driving demand for oil. Increased economic activity brings an increase in energy-intensive activities like manufacturing, personal and commercial transportation, and increased vehicle ownership.
Worldwide demand grew so quickly in the years leading up to 2008 that suppliers had a hard time keeping up, bringing crude oil prices to record levels and driving the U.S. average retail gas price to its record high of $4.11 per gallon in July 2008.
But by the fall of 2008, the global economy was weakening. As economic growth stalled, global petroleum demand decreased, and in December gasoline prices fell to $1.69, or $1.89 in today’s dollars.
Geopolitical Events Disrupt Supply
Oil and gas prices are also affected by events that could disrupt the supply of these materials. Sometimes these events actually cause supply disruptions, creating a shortage. But even just a sense of uncertainty can be enough to cause a change in price.
To show just how drastically geopolitical events can affect the price of oil, the EIA provides this graph of crude oil prices with major world events since 1970 marked on the timeline. For example, the Arab oil embargo in 1973, the Iranian revolution in 1978, the Iran/Iraq war in 1980, and the Persian Gulf War in 1990 all caused crude oil shortages, and all correspond to an increase in prices.
This summer, increasing tensions between Russia and Ukraine could threaten the movement of Russian natural gas and petroleum products through Ukraine and into Europe, and may cause an increase in prices.
OPEC Manages the Oil Market
The twelve member countries of the Organization of the Petroleum Exporting Countries (OPEC) produce more than 40% of the world’s crude oil, and hold at least two thirds of the world’s estimated crude oil reserves, according to the EIA.
Because of this, OPEC can exert significant influence on oil prices by setting production targets for its member countries. Lower production targets typically mean an increase in oil prices.
OPEC countries also have "spare production capacity" - the ability to bring oil into production within 30 days, and sustain it for at least 90 days. Spare production capacity provides a cushion for fluctuations in supply. When spare capacity is low, the market is less able to respond to potential supply disruptions, and oil prices tend to rise.
U.S. Oil Production and Exports Increasing, But No Return to $2.00 Gas
In the last presidential election cycle, candidates argued back and forth over the reasons behind high gas prices and how best to lower them. The idea was put forth that by increasing domestic oil production, we could get back to the low gas prices we had in 2008 in the midst of the Great Recession.
U.S. oil production is now climbing at its fastest pace since the late 1960’s. According to the EIA’s most recent report, oil production is expected to rise to its highest annual level since 1972 next year. With such a booming business, drivers may be hoping for relief at the pump.
Unfortunately, the experts at AAA say we’re in for disappointment.
Many U.S. refineries are sending their products overseas, to countries like Mexico and Brazil, where demand is rising and prices are better - total U.S. petroleum exports are up 25% compared with last year, and is expected to become a net fuel exporter by 2015. As a result, the supply available in the U.S. is actually relatively low, and prices remain high.
The possibility was even raised this week that the U.S. could start to export the crude oil it produces, which has been prohibited since the 1970s. While concerns persist that allowing crude oil exports could cause gas prices in the U.S. to climb, U.S. Energy Secretary Ernest Moniz has said that the nature and quantity of the oil we’re producing “may not be well-matched to our current refinery capacity."