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EIA explains US gasoline price trends Excess of US supply over US demand hooks country into world market and world prices, driven by international crude prices Alan Bailey Petroleum News
Hard on the heels of a report by the Government Accounting Office forecasting the likely impact on U.S. oil and fuel prices of lifting the ban on U.S. oil exports, the EIA, or Energy Information Administration, has published a report analyzing the drivers behind U.S. gasoline prices. The GAO report said that allowing crude oil exports would likely increase the price of U.S. crude while, at the same time, lowering the cost of fuels such as gasoline in the United States. The EIA report explains the reasoning behind this apparently contradictory view that the price of U.S gasoline would move down as the price of U.S. oil increases.
With the costs associated with retailing gasoline being relatively stable, the primary factors behind gasoline price variability are the cost of crude oil coupled with refining costs and profit margins, the EIA report says. At the same time, gasoline is traded through a series of market hubs, with spot gasoline prices reflecting an active market, both within the United States and internationally.
Oil price divergence Until 2011 the main international benchmark for oil prices, Brent crude, tracked closely with the main U.S. benchmark, West Texas Intermediate. But after 2011, with North American crude supplies rising, and with bottlenecks in some U.S. oil pipeline systems, the two benchmarks diverged, with Brent trading at a consistently higher price than West Texas Intermediate.
But, rather than correlating with the lower U.S. oil prices, the price of gasoline in the United States tracked the higher Brent prices, demonstrating a clear linkage between gasoline markets in the United States and markets elsewhere in the world, the EIA report says.
The ability of gasoline traders to flexibly use different trading hubs links the prices at these hubs, with price differentials reflecting the cost of transporting gasoline between different regions. At the same time, regional gasoline prices also reflect variations in supply and demand in different places, the report says.
Demand growth in Asia around 2008 led to increases in Asian gasoline prices. However, gasoline demand in North America and Western Europe was dropping, putting downward pressure on prices in those regions. In particular, in 2011 gasoline in the U.S. Gulf Coast market began trading at a discount to gasoline elsewhere, the report says.
Increasing competitiveness The increasing global competitiveness of Gulf Coast refineries encouraged increased investment in these refineries and increased output, the report says. Midwest refineries also expanded. Then, with surplus gasoline production coupled with constraints on U.S. gasoline transportation arrangements from the Gulf Coast region, refinery use became a function of gasoline export demand, with spot prices in the region reflecting that shift towards exports, the EIA report says. And, as exports have expanded to an increasing number of foreign destinations, Asian markets have become dominant in setting winter Gulf Coast prices, when U.S. gasoline demand is especially low, while African markets are setting prices during the remainder of the year, the report says.
The bottom line on all of this analysis is that the United States actively participates in the global gasoline market, both as an exporter and as an importer, thus tying U.S. gasoline prices to world prices. Should global oil prices fall as a consequence of U.S. oil exports, U.S. gasoline prices should also fall, as the international cost of gasoline production drops and competition in global gasoline markets pushes prices trends towards cost trends.
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