Image From ..csmonitor.com
Understanding the stormy nature of gasoline prices takes many things, not the least of which is patience. Just three months ago the U.S. national average price of gasoline was approaching $4 per gallon and the media chorus repeatedly asked analysts, economists and men and women on Main Street what the president needed to do and when.
Predictably, politicians eager to score points with voters made it clear that if they were in charge they’d hit the Strategic Petroleum Reserve faster than a college fraternity can tap a beer keg on Homecoming Week.
Over the same time, we've seen the national average fall from $3.92 per gallon in early April to $3.44 today. How quickly the climate has changed… What happened?
With virtually zero governmental intervention, the supply side of the equation strengthened while the demand side weakened, both globally and nationally. U.S. oil production, now at 7.84 million barrels per day, is at its highest level in 14 years.
At the same time, the Saudis report that its oil production exceeds demand by 10 million barrels per day… so something’s got to give. If you guessed that’s the price, you’re correct.
While refinery difficulties in the U.S. this year also tightened fuel supply in some parts of the country, most notably in California, Pacific Northwest and the Northeast, those issues have been resolved for the most part. In the northeast, what could have been a severe supply problem with potential refinery closings was averted with Delta’s purchase of the Conoco-Phillips refinery in Philadelphia and Energy Transfer Partner’s purchase of the Sunoco refinery (335,000 bpd capacity) there too. Both remain in operation.
On the demand side, neither the U.S. nor China -- the world’s largest oil consumers, anticipate robust growth any time soon. Anemic numbers from the U.S. Dept. of Labor reflecting new jobs created in March, April and May tell us there’s no reason to anticipate any uptick in fuel demand by workers returning to nonexistent jobs.
Yes, oil and gasoline prices are impacted directly and indirectly by many factors ranging from global currency fluctuations to regional weather conditions, but the greatest indicator of where they’re going and why remains supply and demand, the Scylla and Charybdis through which free markets navigate daily.