A frequent question I hear is: Why don’t we see falling gasoline prices at the pump now that the US is producing increasing amounts of crude oil, currently at the highest level of output in 26 years, and heading for an all-time record high by the end of next year? The chart above shows that since January 2010, US crude oil production has increased by 54% (and by almost 3 million barrels per day), while at the same time retail gasoline prices in the US have increased by more than 35%, from $2.70 per gallon in January 2010 to $3.66 in April. So why has America’s rising oil production been accompanied by rising, and not falling, gasoline prices for US consumers?
One reason that might explain why gas prices haven’t fallen in the US is that crude oil is a global commodity, and oil prices are determined by market forces at the global level (global supply and global demand), not at the national level. In contrast, rising domestic natural gas production has resulted in falling natural gas prices in the US, because natural gas is a primarily a local, not global, commodity, and US natural gas prices are determined by the local (national), surging supply. Despite the rising production of domestic crude oil, the US share of global crude oil output has increased only slightly, from 7.4% of the world’s crude oil supply in January 2010 to 10.25% of world oil in December 2013. Therefore, the rising oil production in the US, while impressive, hasn’t been significant enough to impact the global supply of oil (or the global price), which would be one reason the rising US oil supply hasn’t translated into lower prices at the pump.
In a recent Cato blog post, international trade lawyer Scott Lincicome (“Gas Prices Are Pinching Again, and You Can Thank U.S. Trade Policy For Some of the Pain“) points to some other important reasons that gasoline prices in the US haven’t fallen: outdated US trade policies that: a) prevent crude oil exports, and b) protect US shipping unions and shipbuilders from foreign competition for transporting oil (or anything else) between US ports. Here’s Scott:
Two archaic, little-known U.S. trade policies – vigorously defended by the well-connected interest groups who benefit from them – restrict free trade in petroleum products and, as a result, force American consumers to pay considerably more at the pump.
First, the Jones Act – a 94-year-old law that requires all domestic seaborne trade to be shipped on U.S.-crewed, -owned, flagged and manufactured vessels – prevents cost-effective intrastate shipping of crude oil or refined products. There are only 13 ships that can legally move oil between U.S. ports, and these ships are “booked solid.” As a result, abundant oil supplies in the Gulf Coast region cannot be shipped to other U.S. states with spare refinery capacity. And, even when such vessels are available, the Jones Act makes intrastate crude shipping artificially expensive. Shipping U.S. crude from Texas to Philadelphia cost more than three times as much as shipping the same product on a foreign-flagged vessel to a Canadian refinery, even though the latter route is longer.
It doesn’t take an energy economist to see how the Jones Act’s byzantine protectionism leads to higher prices at the pump for American drivers. According to one recent estimate, revoking the Jones Act would reduce U.S. gasoline prices by as much as 15 cents per gallon “by increasing the supply of ships able to shuttle the fuel between U.S. ports.”
The second U.S. trade policy inflating gas prices: restrictions on crude oil exports implemented in the 1970s during a bygone era of energy scarcity and dependence that bans exports of U.S. crude oil to any country except Canada. Because U.S. and Canadian refinery capacity is finite, America’s newfound energy abundance has led to a glut of domestic oil and caused domestic crude oil prices (West Texas Intermediate currently selling for $99.74 per barrel) to drop well below their global (Brent) counterpart (currently at $109.48 per barrel).
One might think that this price divergence would mean lower U.S. gas prices, but such thinking fails to understand that U.S. gasoline exports may be freely exported, and that gasoline prices are set on global markets based on the higher Brent crude prices. As a result, several recent analyses – have found that liberalization of U.S. crude oil exports would lower, not raise, gas prices by as much as 7 cents per gallon.
Thus, the Jones Act and the crude oil export ban together inflate U.S. gasoline prices by as much as 0.22 per gallon – or about 6% of the current price at your local gas station. Not everyone in the United States, however, is harmed. In the case of the Jones Act, the American shipping unions and shipbuilders that benefit from the law have long opposed any type of reforms, regardless of the pains imposed on the American economy and U.S. consumers. The crude oil export restrictions, on the other hand, have found new support from a small group of U.S. refiners who profit handsomely from depressed domestic crude prices and the lack of any legal limits on their exports. As is always the case with protectionism, these groups win and U.S. consumers lose.
Given this political dynamic, reform of either law appears unlikely in the near future, regardless of how dramatically the U.S. trade and energy landscape has changed since the laws were imposed. So the next time you fill up the tank, note that about 6 percent of your bill pads the bottom lines of a few well-connected cronies.
MP: While it’s always easy to target and blame the oil industry for high or rising gas prices, they’re really not to blame. In fact, they’re at the mercy of two very, very powerful forces: a) the market forces of supply and demand, and b) government taxes, regulations and trade policies that artificially raise energy prices. Simply put, oil companies don’t set oil and gas prices, the market does; and then government policies play an important role in raising energy prices above market-determined levels. When it comes to assigning blame for high gas prices, we should put anti-consumer, price-raising government policies like the Jones Act and the crude oil export ban at the top of list. It’s another example of how well-connected, well-organized special interest groups like the domestic shipping industry use the political process to protect their industry (and profits) from foreign competition, while raising prices at the pump for all of us disorganized consumers.