It’s True, U.S. Oil Production Has a Limited Effect on U.S. Gasoline Prices: What Does Affect Them are International Oil Prices, U.S. Refinery Capacity, Sulfur Requirements for Refineries, and Renewable Diesel Refining Replacing Crude Oil Refining

     While politicians will sometimes say that we can lower U.S. gasoline and diesel prices by producing more gas here at home, that is really not the case. Increased domestic production can affect international crude oil prices some and since international crude oil prices affect refined product prices (such as gasoline and diesel) there is some effect on them. However, this effect is generally muted, especially when other major producers like those in OPEC+ are limiting production as they are now.

 

Political Party and Presidential Support for Increased Production Has a Limited Effect as Well

     The Washington Post had an informative article investigating whether U.S. crude oil production increases affect U.S. gasoline prices and comparing Trump’s and Biden’s policies to U.S. crude production and gasoline prices. Oil production did increase more under Trump but also increased under Biden, after the Covid drop. Despite the rhetoric of politicians, these production increases have limited effects on gasoline prices. There is no correlation in the data between U.S. oil production and U.S. gasoline prices, although there is a rightly assumed influence.

     The same article also shows that Trump’s claim that the U.S. became more energy-independent under his leadership is partially verified in the data. It was Obama who ended the ban on exporting U.S. crude oil. That oil began flowing overseas in late January 2016, about a year before Trump took office. Exports of crude oil and petroleum products increased until they were hobbled by demand losses due to Covid. They resumed those increases in late 2021-early 2022, increasing further in 2022 as Russian oil was sanctioned. The graphs below show that if we include petroleum product exports with crude oil exports the U.S. became a net exporter briefly in early 2020 and more steadily in early 2022. The later increase had much to do with bans on Russian petroleum products. The second graph below shows that U.S. imports of oil and petroleum products actually peaked in 2006-2007.  

 

Source: EIA

 If only crude oil is considered, we are still very much a net importer of about 4 to 5 million barrels per day (bpd). The maximum net imports of crude oil were about 8 million bpd in 2016. Oil exports grew from about 0.5 million bpd to about 4 million bpd from 2016 through 2019 then dropped and hovered from 3 to 4 million bpd through 2021. Beginning in 2022 till now they have hovered at about 5 million bpd. Thus, net exports have also increased significantly under Biden, although much of that increase is attributable to the loss and restriction of Russian crude on world markets. 

 

While Trump clearly had a more favorable approach to aiding and growing U.S. oil production and exports, they have both grown significantly under Biden as well. The difference between the two is mainly carbon emissions. Trump expressed no concern about carbon emissions while they are a key feature of Biden’s policy initiatives. The article points out that if the U.S. were really energy independent, we could increase gasoline by increasing domestic oil production by decoupling from dependence on the international market. That is only partially true. The reason is that U.S. refineries are by and large designed to process heavy sour crude rather than the light sweet crude produced in the most productive U.S. basins such as those of the Permian and Bakken. In the debate over presidential support of domestic gasoline prices, one can say that Biden was most unsupportive by canceling the Keystone XL pipeline which would have brought in more heavy crude from Canada that can be readily refined by U.S. refineries. The U.S. already gets most of its crude oil imports from Canada. Canada overtook OPEC as the largest supplier of imported U.S. crude in 2015 as the following graph from 2020 shows.

 

Source: OPEC is Now Obsolete: Oil Crisis Update. Matt Badiali. January 13, 2020. Banyan Hill. OPEC Is Now Obsolete: Oil Crisis Update (banyanhill.com)

 

 Mexico is second in providing oil to the U.S. and Russia was third but has been at zero since being cut off. I was curious to see how things are in oil imports since Russia is out, so I constructed the following graph from EIA data. The data show that over half of our imports come from Canada and over three quarters (about 79%) came from the following countries: Canada (53%), Mexico (10%), Saudi Arabia (6%), Iraq (4%), Columbia (3%), and Brazil (3%). It should be noted that the graph also includes refined petroleum products which may have originated in other countries than the country it is attributed to in the graph. For instance, South Korea refines more oil than it produces even though it exports a lot of those refined products.

 

Source: Kent Stewart. Data source: EIA

What Does Affect U.S. Gasoline Prices?

     RBN Energy has some informative content in its blog about what affects gasoline prices. Most of that info is now behind a paywall but some of the variables include octane prices, the new Tier 3 sulfur rule, what type of crude refineries are designed to process, total refinery capacity, and at what percentage of total capacity is functioning on average. Refiners met with U.S. government officials in the summer of 2022 when gasoline prices were high to explain the situation and to brainstorm solutions. The Tier 3 sulfur requirements were delayed. These are very expensive to implement at hundreds of millions per refinery. Total refinery capacity has also been affected by a small percentage of that capacity being re-outfitted to refine renewable diesel rather than crude. While the percentage converted to refine renewable diesel is small, it can affect gasoline prices since refineries have been running at high capacity. It was at just 0.4% in 2020 but has grown a little more in the past few years. Renewable diesel nameplate refining capacity is expected to double by 2026 but it is unclear how much, if any, of that increase will replace crude refining. Renewable diesel is a “drop-in” fuel for diesel consumers but is sold at a higher price due to its decarbonized credentials. No major new refineries have been built in the U.S. for many years (since 1977) and none are expected. There are some small refineries in planning that hope to process small amounts of U.S. sweet crude from the Permian Basin. I wrote about them in March in a post about modularity in construction.

     According to Wikipedia, the EIA, World Economic Forum, and other sources, an online search query about what affects U.S. gasoline prices yields the following:

Factors that affect the price of gasoline in the United States include:

1)     The price of crude oil per barrel

2)     Costs and profits related to refining, distribution, and marketing

3)     Taxes

4)     The charge set by refiners for gasoline based on octane levels, with higher octane levels costing more than regular grade

5)     Distance from supply

6)     Supply disruptions

7)     Retail competition and operating costs

8)     Proximity to supply

9)     Competition with other gas stations

10)  Environmental programs

 

World Economic Forum and EIA break it down into four main factors and their weight by percentage as follows:

Crude oil prices (54%) (this should emphasize international prices rather than domestic prices)

Refining costs (14%)

Taxes (16%) (taxes per gallon vary by state)

Distribution, and marketing costs (16%)

 

What is the Current Supply/Demand Dynamic for International Crude Oil?

     Lower crude oil prices in recent weeks have been a little unexpected. The Saudi oil experts believe it is a deceptive and temporary drop. They did, however, extend OPEC+ production cuts till at least the end of the year. The Saudis say it is a ploy by speculators and oil demand is not weak. Oil shipments increase seasonally in September and October which can give a temporary drop in prices that does not reflect supply and demand dynamics. The Saudi/OPEC+ announcement a few months to extend production cuts did briefly cause a rise in prices and perhaps this is their own reusable “ploy” to increase prices when needed. OPEC expects increased demand of 2 million bpd in 2024 while IEA expects a lesser increase at 800,000 bpd. Many have expected higher oil prices due to the Israel-Hamas war but that has yet to occur. Some analysts predict an avg. crude price of $118/Bbl in 2024 after an avg. of $80/Bbl in 2023. If one were to apply the 54% effect of crude prices on U.S. gasoline prices that would equate to a 50-60 cent rise in gasoline prices for 2024. I hope that is not the case for those prices really affect me.

 

References:

 

It’s time to update your talking points about oil production. Philip Bump. Washington Post. November 9. 2023. It’s time to update your talking points about oil production (msn.com)

 

The drop in oil prices is just a 'ploy' as speculators pretend demand is weak, Saudi Arabia energy minister says. Jennifer Sor. Markets Insider. November 10, 2023. The drop in oil prices is just a 'ploy' as speculators pretend demand is weak, Saudi Arabia energy minister says (msn.com)

 

Don’t Be Lulled By Oil’s Recent Drop. Higher Prices Are Coming. Randall W. Forsyth. Barrons. November 10, 2023. Don’t Be Lulled By Oil’s Recent Drop. Higher Prices Are Coming. (msn.com)

 

OPEC is Now Obsolete: Oil Crisis Update. Matt Badiali. January 13, 2020. Banyan Hill. OPEC Is Now Obsolete: Oil Crisis Update (banyanhill.com)

 

Petroleum and Other Liquids: U.S. Imports by Country of Origin. Energy Information Administration. U.S. Total Crude Oil and Products Imports (eia.gov)

 

Overview of the Production Capacity of U.S. Renewable Diesel Plants through December 2022. March 13, 2023.  Maria Gerveni and Scott Irwin. AgFax. Overview of the Production Capacity of U.S. Renewable Diesel Plants through December 2022 – AgFax

 

Explainer. What drives gasoline prices? We Forum. June 16, 2022. Here are the four main factors driving up US gas prices | World Economic Forum (weforum.org)