Consumers paying attention to the price of crude oil this spring may have wondered why gasoline prices were slow to fall while oil prices were plunging.
After regaining stability in May and June oil prices are falling again, with some analysts predicting they could touch $30 a barrel before the end of the year. But if they do, it doesn't necessarily follow that gasoline prices will go below $2 a gallon as many consumers would like.
For crude oil to become gasoline it has to pass through refineries, and that's where bottlenecks tend to occur. When refineries don't keep up with the demand for gasoline, for whatever reason, the price tends to go up.
But dirt cheap oil, and gasoline that's only relatively cheap, translates into fat profit margins for refineries.
Major refiner Valero Energy reported a quarterly profit of $2.66 a share Thursday, blowing away the Zacks Equity Research estimate of $2.41. Zack's reports the company's profit margin on a barrel of oil rose from $9.84 to $13.71, year-over-year, a 39% increase.
It's against that backdrop that IHS Inc., a business intelligence company, has issued a report making a case for lifting the ban on U.S. oil exports. Congress enacted the ban in the 1970s, when the U.S. imported much of its oil and was suffering from periodic shortages that spiked prices.
It's a very different environment today, the report argues, pointing out that the U.S. now produces more oil than it can use. That, it says, creates inefficiencies in the supply chain, further decoupling the price of gasoline from oil prices.
The study found that the wholesale price of gasoline in the inland Chicago market continued to track those in other markets in recent years, even when when U.S. oil production grew and prices relative to international oil prices declined.
The gasoline price in that market continued to track prices in other domestic and international hubs rather than weaken with the U.S. crude price.
“This latest analysis further confirms what IHS research has consistently shown – that the fear that lifting the ban on U.S. crude exports would raise U.S. gasoline prices is unfounded,” said Kurt Barrow, IHS vice president, downstream energy.
A global commodity
Barrow says that's because U.S. gasoline is a global commodity. It's traded on the international market and international prices influence what American motorists pay.
U.S. crude oil is not an international commodity, since it can't be exported. If it could, the report claims there would be more oil available on the world market, which would bring down gasoline prices in nearly every country.
“Removing the crude export ban would actually lower U.S. gasoline prices by increasing the supply of crude on the global market that is central to determining the price of gasoline the world over,” Barrow said.
The IHS report says removing the export ban on U.S. oil would lower the retail price of gasoline by about 8 cents a gallon. It says such a move would also revive the U.S. oil industry, which has been forced to curtail production in the way of the Saudi Arabia-engineered supply glut.
Will it happen? Probably not anytime soon. Neither party has expressed much of an appetite for lifting the ban and, with an election year looming, neither is likely to propose it.