Business Perspectives

No easy answers to gasoline price puzzle

The fact that the United States has become a net exporter of petroleum products was news to nearly everyone and infuriated many as they filled their gas tanks at near-record prices recently.

Gas consumers need to realize, however, that world petroleum markets are the most integrated and among the most efficient of those for any important commodity. This doesn't mean they are completely insulated from factors other than fundamental production and consumption. There is evidence that speculation in petroleum futures and other derivatives is stronger than most economists would like to admit.

But in such an integrated global market, the sorts of government actions that some would like to see are difficult to implement and probably counterproductive.

First, however, pause to take note of the phrase "petroleum products." The U.S. is still a large net importer of crude oil. It is refined products like gasoline and diesel fuel for which our exports slightly exceed our imports. Overall, we use about 19 million barrels of oil a day, down about 10 percent from pre-recession levels. More than half is imported.

What people don't understand is that while we are a net importer of crude and refined products combined, we still export substantial quantities of gasoline, diesel fuel and jet fuel. These averaged about 2.49 million barrels per day for the first three months of 2011.

For many years, such exports have been less than imports of the same products. But starting in late 2010, exports began to exceed imports. For the first quarter, imports average only 2.16 million barrels per day. The difference of 330,000 barrels a day is less than 2 percent of U.S. consumption and is likely to fall if the U.S. economy continues to grow. And such net exports in refined products offset only 4 percent of overall imports.

However, for many consumers — truckers, for example — the very idea that the U.S. is exporting any gas or diesel raises howls of anger.

That isn't as straightforward as it might seem, however. Crude oil is highly fungible — a unit of oil can be easily substituted by another unit of oil in the market — and refined products even more so. Despite public belief to the contrary, prices for these globally traded commodities are determined by global forces. We could ban exports. This would reduce need for imports. But we would not see prices drop very much, if at all.

And it would make the U.S. refining business at least a bit less efficient. Most of our exports go to Central and South America from Gulf Coast refineries that are strategically located for such exports. They can't easily deliver to high-consumption areas like the Northeast, Southern California or Puget Sound. In many cases it is cheaper to import refined products into those areas even as Gulf Coast refineries send oil across the Caribbean or even to Ecuador, itself a net oil-exporting nation.

Both the U.S. interior pipeline system and tanker terminals have been constructed around this long-established pattern of both importing and exporting refined products. An export ban would throw a wrench into the works, at least in the short and medium run, and would increase overall costs of getting products to users.

But the prices of gasoline, diesel fuel, heating oil and jet fuel already are above the levels needed to sustain production in the medium run. Right now, finished product prices are driven by crude prices. Increases in these largely benefit whoever owns the oil wells and the reserves in the ground, not refiners and distributors.

In some cases, it is the same companies that own the wells and that refine and distribute the products. But in recent decades, the proportion of world reserves controlled by the much maligned major oil companies has shrunk and that of national oil companies in exporting countries has grown.

When people who were paying $2.69 a gallon last year have to pay much more now, they are not impressed with such explanations. And so, populist responses by presidents, such as commissions to investigate price gouging, are a common response. These usually come up with little in terms of hard evidence of market manipulation by major oil companies.

There is a larger question, however, of the effect of large-scale speculation on oil prices by investment banks, hedge funds and others. Such speculation is nothing new, but the volume of futures and options contracts, as well of more complex derivatives, has grown rapidly.

Conventional economic theory holds that speculators perform a valuable economic function in providing liquidity and absorbing risk, making markets more efficient. Moreover, it is impossible to determine at what point speculation becomes excessive. Finally, efficient market theory holds that, over the long run, prices will be driven by fundamental factors of physical production and use.

I'm not convinced of this, and efficient market theories have taken a beating over the past four years. It certainly is a complicated subject, with no easy answers.