News Column

Surge in U.S. Oil Production Holding Down Prices

July 3, 2013
Oil production

A surge in U.S. production of premium crude oil from shale deposits in the Midwest is helping to hold down world oil prices and has prevented a spike in U.S. gasoline prices this summer.

The moderation in prices found in a new study by the U.S. Energy Information Administration is the first evidence that increasing U.S. production is having a major influence on global prices. The study found a pronounced price decline since February, when U.S. average gas prices peaked at $3.79 a gallon. The decline in oil and gas prices defied the usual pattern of rising gas prices seen during the spring and summer as the U.S. peak driving season approaches.

The agency's analysis found that the reduction in prices was due to the success of oil producers in the Midwest at moving their crude oil by rail this spring to East Coast refineries, where it was needed to produce the super-refined gasoline blends required by environmental law for use in the summer.

In the previous two years, with no pipelines built as yet to funnel the oil to either coast, the Midwest crude had been stuck near the wellhead, creating a glut of crude oil in the Midwest while East Coast refineries were forced to import more costly premium crude from Nigeria and other sources overseas, driving up the price of summer gasoline.

This year, rail and barge connections from the Bakken shale wells in North Dakota made it possible for refineries in Philadelphia to obtain and process the U.S. crude, keeping prices at the pump low and declining to about $3.50 in the past week -- significantly below their winter peak.

The breakthrough in shipping Midwest crude to the East Coast also is helping to lower global oil prices by reducing U.S. demand for premium crude from overseas, the agency said.

Overseas prices for premium crude were as much as $23 a barrel higher than U.S. prices in February, the energy agency said, but that differential has fallen to as little as $6 a barrel since. On Tuesday, premium crude was trading close to $100 a barrel in New York and fetched about $110 in London, where crude from Nigeria and elsewhere around the world is priced.

"Yes, Virginia, U.S. oil production can influence world oil prices," said Karl Smith, economics professor at the University of North Carolina at Chapel Hill, noting that this is the first evidence that the jump in U.S. production from shale deposits in the last few years is having an effect on global prices.

The decline in pump prices since February closely tracks the decline in London's Brent crude price, which has become the worldwide benchmark for premium crude and directly impacts the price of gasoline, he said.

"U.S. production is beginning to set the world price and the price that consumers pay," he said. That has made the U.S. "in economists' terms, the marginal producer," displacing Saudi Arabia, for the time being, as the producer with the most influence on prices, he said.

Mr. Smith expects the price to fall even more in coming weeks. "This will save consumers money at the pump," and provide a boost to the economy, he said.

John B. Townsend, spokesman for AAA Mid-Atlantic, called the moderating prices trend "welcome news for vacationers and day-trippers ready to ramp up summer travel" over the Independence day holiday, which is traditionally one of the heaviest driving seasons in the U.S.



Source: (c)2013 The Washington Times (Washington, DC) Distributed by MCT Information Services