What Drives U.S. Gasoline Prices?
Release date: October 30, 2014
Preface
U.S. oil production has grown rapidly in recent years. U.S. Energy Information Administration (EIA) data, which reflect combined production of crude oil and lease condensate, show a rise from 5.6 million barrels per day (bbl/d) in 2011 to 7.4 million bbl/d in 2013. EIA's Short-Term Energy Outlook (STEO) projects continuing rapid production growth in 2014 and 2015, with forecast production in 2015 averaging 9.5 million bbl/d. While EIA's Annual Energy Outlook (AEO) projects further production growth, its pace and duration remain uncertain, as shown by the significant differences between Reference case and High Oil and Gas Resource case projections, which differ in both the timing and level of the highest volume of U.S. crude oil production. EIA's next update to the AEO will raise projected production significantly in the Reference case.
Recent and forecast increases in domestic crude production have sparked discussion on the topic of how rising crude oil volumes will be absorbed. Given the likelihood of continued growth in domestic crude production, and the recognition that some absorption options, such as like-for-like replacement of import streams, are inherently limited, the question of how a relaxation in current limitations on crude exports might affect domestic and international markets for both crude and products continues to hold great interest for policymakers, industry, and the public. In response to multiple requests, EIA is developing analyses that shed light on this question.
A change in current limitations on crude oil exports could have implications for both domestic and international crude oil prices. To the extent that current limitations on exports cause domestic crudes to sell at lower prices than could occur if those limitations were relaxed, such a relaxation could raise the price of domestically produced oil. If higher prices for domestic crude were to spur additional U.S. production than might otherwise occur, the increase to global crude oil supply could reduce the global price of crude. The extent to which domestic crude prices might rise, and global crude prices might fall, depends on a host of factors, including the degree to which current export limitations affect prices received by domestic producers, the sensitivity of future domestic production to price changes, the ability of domestic refiners to absorb domestic production, and the reaction of key foreign producers to changes in the level of U.S. crude production.
While crude oil prices matter to those involved in producing oil or refining oil into products, most Americans, and the policymakers who represent and serve them, are mainly concerned with the price of gasoline and other refined products. With U.S. gasoline consumption running at 8.8 million bbl/d and the average retail price of gasoline for all grades at $3.58 per gallon, the average American household spent $2,600 on gasoline in 2013. Recognizing that the possible relaxation of current export limitations could cause the prices of domestic and international crude grades to move in opposite directions (the former tending to rise, the latter tending to fall) one question of interest to policymakers and the public is which crude prices, domestic or international, matter most to the determination of gasoline prices in the United States. This paper focuses on that question, and also explores how linkages across regional and international markets where gasoline is sold have evolved over time and influence gasoline pricing in domestic markets.
While the linkages that motivate the hypothesis that a relaxation of limitations on crude oil exports could cause domestic and international crude grades to move in opposite directions are briefly discussed above, the extent of any actual change in domestic production or the domestic or international price of crude oil that might follow from a relaxation of crude oil export limitations is not addressed in this paper. EIA is undertaking further analyses that will examine those issues and expects to report additional results over the coming months.
Executive summary
This analysis provides context for considering the impact of rising domestic light crude oil production on the price that U.S. consumers pay for gasoline, and provides a framework to consider how changes to existing U.S. crude oil export restrictions might affect gasoline prices.
Given the likelihood of continued growth in domestic crude production, and the recognition that some absorption options, such as like-for-like replacement of imported crude oil streams, are inherently limited, the possibility that a relaxation of current policy limitations on crude exports might affect domestic and international markets for both crude oil and products, particularly gasoline, is an important issue.
EIA's analysis of the factors affecting U.S. gasoline prices is twofold. The analysis first considers the relationship between U.S. spot gasoline prices and international and domestic spot crude oil prices, represented by Brent and West Texas Intermediate (WTI), respectively. The second part of the analysis focuses on the interrelationship of U.S. and worldwide gasoline prices and the extent to which global gasoline prices are important in determining U.S. gasoline prices. This analysis takes into account regional and global gasoline supply/demand balances and arbitrage, as well as how the competitive advantage of U.S. Gulf Coast (USGC) refineries is changing the dynamics of U.S. regional and global gasoline pricing.
Key observations from EIA's analysis of the relationship between gasoline and crude oil include:
- Brent crude oil prices are more important than WTI crude oil prices as a determinant of U.S. gasoline prices in all four regions studied, including the Midwest.
- The effect that a relaxation of current limitations on U.S. crude oil exports would have on U.S. gasoline prices would likely depend on its effect on international crude oil prices, such as Brent, rather than its effect on domestic crude prices.
- The WTI crude oil price lost much of its power to explain changes in U.S. gasoline prices after 2010, when its differential to Brent crude became wider and more volatile.
- The Brent crude oil price lost very little of its power to explain changes in U.S. gasoline prices in the post-2010 period.
Key observations from EIA's analysis of global gasoline price relationships include:
- Gasoline is a globally traded commodity and, as a result, prices and changes in prices are highly correlated across global spot markets.
- Gasoline balances and flows around the world are changing.
- Increasing demand in Asia, Latin America, and the Middle East has been outpacing increases in gasoline production in those regions.
- Demand is declining in the United States, but refinery production of gasoline is rising, resulting in increases in U.S. exports of gasoline into the global market.
- Demand is declining in Europe, adding to its gasoline oversupply; excess European gasoline now competes with increased exports from the United States.
- Because of these changing supply and demand patterns, global gasoline price relationships are changing; USGC and Chicago spot gasoline prices, which are closely linked, are now often the lowest in the world during the fall and winter months.
- U.S. gasoline exports grew rapidly from 2009-2012 but have since leveled off; however, Gulf Coast gasoline is now being exported to more distant markets, routinely including Africa and, during the winter months, Asia.