Green Update: The Real Cost of Gasoline

September 20th, 2011

Weekly gas prices

With gas, you know what you’re buying, but you have no idea what you’re paying for.

And the fact that people are unaware of where their money goes has all kinds of implications—behavioral, economic and political.

A week ago, the L.A. Times ran a piece telling us that U.S. drivers are going to spend some $491 billion for gasoline this year. That in itself is an astonishing figure, and it’s the highest amount ever.

What astonished me more was this statement: “Fuel prices have been high this year because of expensive oil and increased exports of gasoline and diesel to other countries.” Yes, exports.

In just the last few months the U.S. has become a net exporter of refined fuels, according to Energy Department statistics. That’s a big change from as recently as May, when U.S. imports of refined fuels exceeded exports by 800,000 barrels a day. Most recently, exports have been running ahead of imports by 467,000 barrels a day, with much of the fuel going to Latin America and South America.

Chicago oil traders

Chicago oil traders

It seems a huge spread has developed between the price of U.S. benchmark crude (West Texas, around $88 a barrel) and the trading benchmark Brent North Sea Crude ($112). The price of Brent in London has bounced around, largely owing to the uprisings and craziness in the Middle East.

So, after years of being told about the dangers of relying on imported oil, turns out it’s now cheaper to refine the gas from local sources and send it abroad. Hence, the profit in exports. But the price of U.S. gas remains high, and will continue high because our refiners are dealing in a world market, and demand is way up. China is really into cars, you know.

Much of the export is diesel, which means refiners devote less production to gasoline. And there are other factors, such as supply bottlenecks, lack of pipelines and the rising cost of Alaska oil, which explain (in part) why California prices are so high.

While national average gas at the pump was down to around $3.60 last week, it remains an incredible bargain, compared to the price in most Western countries. The fact that we are now exporting perhaps our most important resource is also incredible.

If Americans understood just how much their behavior was controlled by the oil markets, perhaps that behavior might begin to change, though probably not. A much higher gas tax might slow consumption, but unless we see more regulation on the producers and refiners, you can be sure the cost at the pump will continue upwards, along with their profits.

Some countries, like Mexico and Venezuela, subsidize their oil production and keep prices low. Should the U.S. consider that course?

—jgoods

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  1. Randy
    September 22nd, 2011 at 06:42 | #1

    One of the great ironies of the current political scene is that another Texas oilman is one of the front runners for the Republican presidential nomination. (Anyone who is a politician in Texas is a swag of big oil, whether they admit it or not.) On the good side, I think the electors will look at their house and 401K values and the price of gas and avoid electing “dubya light” but you never know– the American electorate seems to be going from dumb to dumber.

  1. November 29th, 2011 at 14:27 | #1