The recent spike in gas prices in our region is only the latest sign that the traditional rules of supply and demand do not work when it comes to the oil industry.
U.S. consumption of gasoline has been falling steadily in recent years, partly as a result of the weak economy, but also because American consumers have finally wised up about the value of automobile fuel efficiency.
The decline in gasoline demand is actually somewhat extraordinary. According to the federal Energy Information Administration (EIA), U.S. demand for gasoline fell to its lowest level in 16 years this past month. And that’s despite the fact that there are more cars on the road today than back in 1997, the last time demand fell to this level.
At the same time, U.S. production of oil is at the highest level in nearly two decades, having increased by 14.6 percent in 2012 alone, the highest year-to-year increase since at least 1900. When it comes to domestic oil production, the Drill, Baby, Drill crowd has clearly won the day.
So why is gas at over $4 a gallon in northeastern Minnesota?
It’s because oil production is only part of the equation, and the vertically-integrated oil industry has a huge financial interest in keeping energy supplies tight, even as production rises and demand falls.
And the industry has done a very good job (from their perspective) of managing supplies to guard against the possibility of a glut on the market that could send gas prices lower. Over just the past three years, in fact, the industry has responded to falling demand by sharply curtailing its refining of gasoline. Three years ago this month, the nation’s refineries were producing about 3.5 million barrels a day of gasoline for the U.S. market. As of the first week of May this year, that had fallen to 2.1 million barrels a day. While the output varies from week-to-week, and is tracked as a weekly average, the downward trend in refinery output is not just a temporary blip— it’s a noticeable trend based on data from the EIA.
The reduced refinery output keeps supplies tight and creates spot “shortages” whenever so much as a minor hiccup occurs in the supply lines. In our most recent case, it was supposedly the maintenance shutdown of three refineries serving the Midwest market that created our May price shock. But these price spikes have been occurring all across the country in recent years. This past winter, gas briefly spiked to over $6 a gallon on the West Coast, and the Northeast saw a similar price hike before that. For the industry, these quick price shocks are an effective means of padding their profits, without creating the kind of public backlash they see when prices are raised across the board. While the shocks invariably lead to calls for investigations, by the time the questions start the price goes back down and everyone reverts to business as usual, until the next time.
These industry tactics put the lie to the argument that more oil production will somehow lead to lower prices at the pump. The fact is, cars burn gasoline, not oil, and the nation’s biggest oil companies have increasingly bought up and permanently shuttered independent refinery capacity and can now manipulate supply at will to keep gasoline prices high. In fact, in 2011, the Federal Trade Commission concluded that the major refineries were intentionally withholding supply to keep prices high. Other federal investigations have made similar findings.
Industry promoters have tried to argue that tougher environmental regulations are behind the falling refining capacity in the U.S., but that’s bunk. The industry has made no efforts to increase refinery capacity in the U.S. in decades— they focused instead on buying up smaller, independent refineries and shutting them down. Only a fool would believe the industry is interested in spending billions to build new refinery capacity at a time when gasoline demand is falling.
There is a way to address the problem. In the past, the federal government played a much bigger role in regulating the oil industry, including regulation of refinery output. If Americans want cheaper gas at the pump, it will take a return to that kind of regulation, to ensure that big industry players aren’t gaming the market to boost profits. The alternative to regulation is a stiff windfall profits tax.
With both of those options unlikely given Republican control of the U.S. House, that leaves Americans left to buy more fuel efficient vehicles. That won’t necessarily bring down the price of gas (since supply is artificially manipulated), but it will help ease the pain at the pump.