Exports and Ethanol Impact Gasoline Prices

With U.S. oil production soaring and demand for gasoline falling, why are pump prices rising, consumers, small businesses, and local governments want to know.

Yesterday, OPEC was the culprit behind rising fuel prices by limiting the supply of crude oil in the face of growing world demand. Today, the U.S. has nearly weaned itself from OPEC oil as domestic production grows, but must still import crude oil from South America and Mexico. Tomorrow, experts say, U.S. domestic oil production from shale will exceed Saudi Arabia’s.

In early July, oil production in the U.S. jumped to its highest level since January 1992, according to the Energy Information Administration. In March reliance on imported oil had dropped to 11%.

Meanwhile, gasoline refineries have increased production capacity even as domestic demand remains flat. A giant BP refinery in Indiana just expanded to process an extra 250,000 barrels of oil per day.

So, shouldn’t more domestic oil and greater supplies of gas bring prices down?

Well, only if that supply is kept in the U.S.

In 2011, the U.S. exported more gasoline, diesel and other fuels than it imported for the first time since 1949, according to the Department of Energy. Gasoline exports tripled over the last decade.

“The more fuel that’s sent overseas, the less of a supply cushion there is at home,” USA Today reported. “American refiners find it more profitable to sell gasoline, diesel, and other products abroad,” Bloomberg Businessweek reported.

Now come reports that oil companies want to export American crude oil. Congress blocked crude oil exports after the 1970s Arab oil embargo. Only limited exports to Canada have been authorized. The Wall Street Journal reported in April, “with domestic production booming, energy-company executives are questioning whether the U.S. needs every drop of petroleum it extracts.”

One of the arguments made for exports is that oil from shale is too light for American refineries designed for heavier imported oil. Lighter oil, producers say, is better suited for Europe’s refineries.

The consequence of making U.S. oil and gasoline available to global markets is to permanently tie domestic prices to global prices. A well-supplied, competitive domestic market could avoid the speculative price disruptions the global market suffers every time something happens in the Middle East. But, oil producers and refineries want to export to global markets where demand continues to grow and profits are higher.

Also impacting gasoline prices is the high price of ethanol. The government currently requires a 10% ethanol blend, which reports say adds 17 cents to the price of each gallon of gasoline. The blend requirement moves to 15% over the next few years.

Ever higher fuel costs are tough on most consumers, many small businesses, and all local governments.

What will Congress do on this one?

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