When asked about rising gas prices, President Bush invariably answers that the price at the pump is a function of worldwide supply and demand for oil. On April 25, 2006, the White House released a fact sheet about, and 4-part plan to confront, high gasoline prices. It stated, in pertinent part:
It Is Important To Understand Why Gas Prices Are High. The market for oil is global, and America is not the only large consumer. Countries like China and India are consuming more and more oil, so global demand for oil is rising faster than global supply. As a result, oil prices are rising around the world, which leads to higher gas prices in America. America's gasoline demand is projected to increase this summer, and our refining capacity is stretched tight, making it difficult for supply to keep pace with demand.
To a considerable extent, I agree with President Bush. Gas prices are predominantly a function of supply and demand for oil worldwide. Supply and demand does not, however, explain why U.S. gas prices have plummeted
24 cents over the past weeks and over
60 cents since August. Here's what you haven't been told...
(cross-posted from
Our Republic)
World demand in Q3 2006 rose to a staggering 84.21 million barrels/day (mb/d), up from 82.79 mb/d in Q3 2005. World supply in Q3 2006 was in the neighborhood of 84.5 mb/d, a slight increase from 84.2 mb/d in 2005. In other words, In August 2006, this dramatic increase in demand relative to supply translated into an average national gas price of $3.04. At the time, CNN Money reported the following:
With a national average of $3.036 for a gallon of regular, prices are already within easy reach of the all-time record high of $3.057 set last September in the wake of Hurricane Katrina . . .
When word spread that OPEC revised earlier estimates of projected demand for Q4 2006 and 2007, the media pounced and America awoke to headlines like "
OPEC: Demand for crude will drop in 2007." Of course, had anyone actually read OPEC's monthly oil market report for
September, they would have known that OPEC reduced their Q4 2006 estimate from 85.95 mb/d to 85.63 mb/d. OPEC's present forecast pegs 2007 demand at 85.7. Needless to say, the revised estimate for Q4 2006 marks an 1.1-1.2 mb/d increase from Q3 demand. Seeing as gas prices have dropped over 60 cents since August, there must have been a substantial increase in supply relative to demand, right? Wrong.
To be sure, there is a projected 1.3 mb/d increase in total non-OPEC oil production in Q4. However, this projected supply increase merely offsets Q4 demand growth. To boot, OPEC has steadily decreased production from 29.9 mb/d in 2005 to 29.7 in Q1 2006 to 29.6 in Q2 2006 (the last quarters for which there is data on OPEC production). Yesterday, it was widely reported that OPEC intends to continue it's production cuts. OPEC President told Reuters, for example, "something needs to be done to steady the price." In short, corresponding increases in supply and demand have effectively left us where we were in August.
Although American gas prices are predominantly based on the supply and demand for oil worldwide, geopolitics and expectations (financial and otherwise) have limited roles. In early August, for example, increasing chaos in Iraq, a supply disruption in Russia, a shutdown BP pipeline in Alaska and the progressive of tropical storm Chris towards the Gulf Coast coincided to drive the price of oil just over $70 a barrel. Except for the mild effect terrorist activity in the UK had on the demand for airline fuel, the world breathed relatively easier by the end of August and the price closed the month at $68. While some are surprised at a lower price of oil in beginning of September, it's a trend as old as the automobile and summer have been friends. Finally, the price of oil bottomed out at about $60 as the summer driving season closed and world economy enjoyed relative calm before supply and demand brought it back in line at $66/barrel by mid-September.
At this point you may thinking, "Well, that's alot of movement." It really isn't (you may recall the good old days of September 2003 when oil was $25/barrel). The last time the world price of oil hovered about the low-to-mid 60s was in April 2006, when the retail price of gasoline in the U.S. averaged roughly $2.75/gallon. At the start of April, when the world price of oil dipped into the upper-50s, the U.S. retail price fell to about $2.57/gallon. When the average world price resided in the upper-60s from the end of April through the months of May and June, American consumers paid, on average, $2.79 to $2.89/gallon.
To summarize what we've established thus far, the world price of oil is presently $63/barrel with upward pressure on account of a September supply and demand profile comparable to that seen in August. Now we get to the American miracle at the pump. While the world price climbed from $60 to $66/gallon in the first half of September, the retail price of gasoline in the U.S. plummeted just short of 12 points in a week; and then plummeted another 12 points this past week. Although the world price took a brief dip into the upper-50s before climbing to the present $63 (and expected to maintain it's upward trajectory), only in Candyland could such movement cause the average U.S. gas price to fall to $2.38/gallon. In any event, the first 12-point drop commenced well-before the world price took it's downward detour.
Is there any wonder then that Americans are "suspicious about gas prices" while 42% are of the opinion that the White House is manipulating gas prices? Meanwhile, the White House and conservative pundits are constantly reminding us that the President cannot manipulate gas prices, at least to the extent of the increase we've seen. Of course he can't . . . but Saudi Arabia can. This, I would venture, is possibility 1.
Let us not forget that the Bush clan shares an intimate personal relationship with the Saudi royal family; that Saudi Arabia is the world's leader oil supplier and, more importantly, reigns supreme in the Kingdom of OPEC. The two-week, 24-point plummet in U.S. gas prices followed two sudden reductions in the Saudi oil price over the same two weeks - just under $3 the first week and $4 the second week. On September 22, the Saudi oil price had fallen to $56.80/barrel. Of course the rest of OPEC followed suit albeit with lesser price reductions. As the OPEC September report reveals, the Saudi/OPEC reductions occurred notwithstanding the fact that OPEC was producing roughly the same amount of oil in August (the latest reported month) as in June. In June, however, the Saudis were charging between $61.55 and $63.68/barrel.
Possibility 2 is that U.S. oil refineries slashed gasoline prices to better GOP prospects in November and thereby secure Congressional indifference to increasingly exorbinant profits amidst the inevitable rise in gas prices to come. On page 18 of the OPEC September report, refined products prices, which include fuel oil and diesel prices, remained constant or increased with one exception: gasoline. After the price of refined gasoline (regular and premium) rose rom $106.21/barrel in June to $108.10 in July, it plunged to $97.94/barrel in August. Even if U.S. refinies did not slash prices on their own accord, one could also speculate that the Saudi reductions reflected quantities sold to American oil companies to benefit a mutual friend.
To what can we attribute current gas prices? Perhaps we will soon find out. I can say, however, that the supply and demand argument is tenuous at best.