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www.AmericanSecurityProject.org1100 New York Avenue, NW Suite 710W Washington, DC
Cause & Eec:U.S. Gasoline Prices
Andrew Holland and Harper Dorsk 
April, 2012
IN BRIEF
•
Te curren price o gasoline arks he 3rd ie in 4 ears ha prices have goneabove $3.75 per gallon.
•
Gasoline prices are ver closel correlaed wih he price o crude oil.
•
Oil prices, in urn, are ied o evens largel ouside o Aerica’s conrol.
•
Oil prices depend on he inerpla o suppl, deand, and he percepion o u-ure changes in suppl or deand.
•
Te onl wa o reduce our vulnerabili o spikes in oil prices is o use less o i
Curren Gasoline & Oil Prices
•
Te national average price o a gallon o regular unleaded gasoline in April, 2012 is$3.94
•
42 cents higher than the 2011 average, but 17 cents below the 2011 peak.
•
Gasoline prices oen ollow a cyclical pattern, rising in the Spring, peakingin the early Summer, and alling through the autumn. oday’s prices are thehighest on record or April.
•
Te spot price o crude oil has traded at a price o between $103 and $108 per barrel(WI) since the beginning o March, 2012
•
Te 2012 spike in prices is dierent rom recent spikes because, unlike in 2008 (peak o $4.11/gallon) and 2011 (peak o $3.96/gallon), in which prices increased by over30% in just 6 months, prices were already high; there has only been an 8% growthsince October, 2011.
 
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 AmERICAN SECURIty PROjECt
U.S. Gasoline marke Is Par O Te Global Oil marke
Te price o gasoline is dependent on the global price o crude oil.
Global Suppl 
Global Production o oil is about 89.6 million barrels o oil per day. I all else remains equal, we shouldexpect increases in total supply to reduce oil prices over time. High prices should also work to drive greatersupply over time by increasing the return on investment or oil production.
 
3
Global Deand
Te global demand or oil today is about 89.1 mbd. Te dierence between supply and demand is used tobuild stockpiles, both by businesses and governments. Only in times o very high demand growth doesdemand exceed supply. Higher prices work to can put a reduce demand by pushing consumers towardssubstitutes or greater eciency.
Predicions Abou Fuure Suppl and Deand
Te nal actor in global oil prices is predictions about uture direction o oil supply and demand. Oenderided as ‘speculators’, the entities that buy and sell contracts or oil to deliver at a uture date are essen-tially making bets about what the uture price o oil will be.Tis speculation allows businesses who rely on oil, like airlines, to ‘lock-in’ stable, long term oil prices.In theory, utures markets smooth price changes by allowing predictions about uture demand or supply shocks to be priced into the market. On the other hand, rapid swings in sentiment can cause quick shisup and down, seemingly outside o the undamentals o supply and demand. However, market pressuresmean that utures markets will ultimately refect underlying conditions.
“Spare Capaci”
Even more important than actual production is potential production that is not being used – termed“spare capacity” by the industry. Te only major oil producer who generally retains spare capacity is SaudiArabia. By keeping capacity in reserve, the Saudi government can respond to rapid changes in supplieselsewhere in the world in order to moderate supplies. By maintaining this spare capacity, the Saudi gov-ernment manages the OPEC oligopoly and maintains control on prices.
How Does Increasing U.S. Doesic Producion Aec Prices?
U.S. oil production today is about 8.2 mbd, while consumption is about 18.6 mbd. Over the past ve years,the U.S. has seen a rapid increase in domestic oil production; with an increase o 20% since March, 2007.While that sounds large, we see that as a part o the larger global oil market; that growth is only 1.5% o global oil production – and it was overwhelmed by global demand growth o 3.7 mbd in that same timeperiod.Te U.S. is the world’s single largest consumer o oil, but consumption has dropped by 12% drop overthose same ve years. However as America’s share o oil consumption has waned, growth in oil consump-tion in countries like Brazil, China, and India has been aster than our decline.Tere are two reasons why the growth in U.S. domestic production does not reduce oil prices.First, the increased production is simply not large enough, in contrast to global supplies, to make a dier-ence.Second, or the most part, the new oil production brought on line over the past ve years has a high extrac-tion and investment cost, coming rom either shale oil ormations or deep oshore.o generate an economic return, this new production relies on the high price o crude oil; i global crudeprices collapsed, exploration companies would not make enough return on investment to justiy drilling.
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