Lesson in gasoline economics

August 1, 2013 

I have tried to respond to Lori Felts letter about U.S. oil production when asked by others before, but let me try again.

U.S. oil production does not have a direct influence on the price of oil (gasoline). Oil is an international commodity and is traded by commodity markets worldwide. While any increase or decrease for any reason creates fluctuations at the pump, it really does not matter where it comes from, the price is the same based upon inventories and demand worldwide. The two most watched measurements on commodity markets are TexMex and Brent crude. The price changes as world demand, including that held in abeyance by speculators, fluctuates. Speculators buy "futures" (estimated future production) in the hope that it will drive the price up and then they can sell what they bought at a profit.

The one thing the United States has which can directly affect the price at the pump is refining capacity. The amount of oil available currently exceeds the amount our current refineries are capable of refining into gas and other products. The last new refinery in the U.S. was built in 1973. Why? Because the government once ruled that any repairs to existing refineries that exceeded 50 percent of the cost of a new one, would require the oil companies to build a new one. Big Oil has not done that. Why would they when it would mean that they would get less at the pump. It's not supply and demand if the supply is "rationed" by the supplier.

Joseph M. Reichert


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