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API Says Extending Domestic Fuel Supply Lowers Consumer Gas Prices—Who Knew!?

October 31, 2014


Add another file to the Big Oil hypocrisy dossier. Yesterday, the American Petroleum Institute (API) released a study arguing that the fracking boom has led to dramatically lower prices for crude oil and refined products over the 20082013 timeframe. The study suggests that increased domestic production of crude oil, natural gas liquids (NGLs) and lease condensate from fracking has extended U.S. supplies, thus exerting downward pressure on prices. In round numbers, the study says every 1 million barrels/day of new supply reduces consumer prices for petroleum products by roughly $0.060.20 per gallon. Makes sense in theoryEcon 101 tells us that more supply generally results in lower prices. But there are two big problems with APIs argument:
  • Problem 1: Global demand for petroleum products continues to grow faster than global supply. EIA data show global production of crude oil, NGLs and condensate grew by 4.1 million barrels/day between 2008 and 2013. But global consumption of those products ramped up by 5.4 million barrels/day over the same period. Thus, demand gains outstripped supply gains by more than 30%. Crude oil is a global commodity, and supply gains in one part of the world are often offset by losses in another. Thats why oil prices remained at record-high levels in the 20082013 timeframe. Would oil prices have been even higher without the increase in U.S. supplies? Yes, probably; but that leads us to Problem 2
  • Problem 2: When energy economist Phil Verleger and researchers at Louisiana State University, Iowa State University, University of Wisconsin, the Department of Energy, and others separately showed that extending the U.S. gasoline supply with ethanol leads to lower pump prices, Big Oil defiantly screamed NOT SO! Verleger found that consumers paid $0.50$1.50 per gallon less for gasoline in 2013 because of ethanols extension of the fuel supply. His conclusion corroborated results from Iowa State/University of Wisconsin that showed consumers saved up to $1.09 in 2012 due to ethanols aggregate effect on gasoline supplies. These results obviously bothered the folks at API, who had been busy spinning the ridiculous yarn that ethanol and the RFS were somehow causing higher gas prices. And not surprisingly, an economist from MIT (which incidentally received more than $130,000 in grants from API between 2008 and 2012) wrote a paper suggesting that the Iowa State/Wisconsin results were spurious.
So, which is it API? Does adding volume to the fuel supply reduce prices, or doesnt it? You cant have it both ways.