Why Gasoline Prices Are High

Tea Party ranting and GOP candidates’ pronouncements aside, American presidential or Congressional decisions, or the lack thereof, have not one thing to do with the price of gas now and most likely into the future, not unless the U.S. goes to war to secure petroleum reserves. The cost of petroleum is set on the global market and by conditions in oil-producing nations, not by politics here in the U.S.

So, let’s cut straight to the reality of rising gas prices. Be warned: the problem is neither simple nor straightforward.

Global production of oil from all sources was essentially flat from 2005 to 2010 (the last year for which global data are available). To be absolutely accurate, world oil production rose approximately 2.7 percent during that period, amounting to an annual growth rate of around 0.45 percent.

In the recent past, oil supplies from Iraq, Libya, and Iran have been disrupted or reduced.

Demand from Asian nations is spiking and will likely continue on a tear into the foreseeable future.

Economic sanctions imposed on Iran by the U.N. and responding threats by Iran to stop oil production and close the Straits of Hormuz have caused an increase in the futures market; although most petroleum economists believe the role speculators play overall is fairly minor, that situation may change quickly if war breaks out between Iran and Israel.

Internationally, oil is valued in U.S. dollars, thus, the 40 percent decline in the value of the dollar over the last five or six years resulted in upward movement of oil prices.

Since December 2011, the U.S. has lost about four percent of its refining capacity when two refineries in Pennsylvania and one in St. Croix closed.

Most East Coast refineries are configured to refine Brent “sweet” crude, which is a benchmark of light, low sulfur oil that comes from a blend of crudes from fields in the North Sea. As Brent prices have risen in comparison to heavier crudes from Canada and South America those refineries have been forced to produce more expensive gas than that produced in the Midwest, which can refine cheaper crudes, especially West Texas Intermediate and the heavier crudes mentioned above.

Several U.S. oil refineries temporarily shut down this winter to make refining process adjustments to be able to meet increased demand during the summer driving season; that shut-down has decreased supply and caused upward pressure on pricing.

No new American oil refineries have been built in decades and none will likely be built in the future, nor will refining capacity be increased; all of which will have the effect of further constraining domestic gasoline supply.

Annually, the U.S. consumes about 22-24 percent of the world’s petroleum. We’re energy addicts and energy hogs, no doubt. The problem is we like it that way and have no desire to change our behavior. Where energy is concerned most Americans act like spoiled, narcissistic children who have no desire to understand the complex reality. We want what we want, when we want it, and want it to be cheap. Period

What we have today in terms of gasoline prices is a perfect storm that has no easy solution. But Americans want an easy solution that won’t cost us a dime more than we are prepared to pay. Hate to burst your bubble but that ain’t gonna happen any time soon.

Let me lay it out in the simplest terms possible. World-wide production of crude oil has plateaued and will likely begin decreasing in the near future. Global demand is increasing and will continue to do so. Supply of refined oil products (gasoline) is limited by low production of crude oil and by refinery constraints (intentional and unintentional).

The conclusion: low gas prices are history. Americans should get used to it and stop their pathetic whining.

One more important point. Politicians and others who promise that they can deliver cheap gasoline and other non-renewable sources of energy by increasing American production are lying. If you do not believe that statement you desperately need to educate yourself on energy economics and stop listening to TV commercials that intentionally distort energy realities.