Don’t blame ‘Big Oil’ for high gas prices. Blame ‘Big Corn.’

Mark J. Perry |

April 2, 2013, 11:57 pm

A frequent question that has beeen asked in recent months is why the record increases in America’s crude oil production over the last several years haven’t translated into lower prices at the pump for gasoline in the US. A recent BloombergBusinessweek article explains “Why Abundant Oil Hasn’t Cut Gasoline Prices,” here are some edited excerpts:

For the first time since 1995, the U.S. will produce more oil than it imports, but the benefits of all that cheap domestic crude still haven’t shown up at the one place it matters most: the gas station. Even as fuel consumption has fallen to 16 percent below its 2007 peak, gasoline remains a dollar higher than the average price over the past decade.

Simple economics suggest that higher supplies and lower demand should translate into cheaper prices. That presumes today’s petroleum markets are simple. Over the last year, the oil boom has upended the long-held belief that U.S. production would inexorably decline while America’s appetite for gasoline continued to rise, leaving the country hopelessly hooked on foreign crude. As the opposite has occurred, regulatory and transportation systems that grew out of those old assumptions have become increasingly outdated, preventing the forces of supply and demand from working efficiently.

And ethanol requirements have backfired. The idea was to stretch a limited oil supply, cut reliance on imported crude, and make use of abundant corn harvests. But today the ethanol program is raising costs for refiners even as the price of oil has fallen 10 percent over the last year.

U.S. refiners retain a price advantage over their foreign competitors in Europe and Latin America, since U.S. crude is still cheaper than most foreign benchmark blends. This has led to healthy profits for some of the nation’s largest refiners. Now those lucrative margins have come under pressure as fuel makers run headlong into a biofuel mandate that has become tougher and more expensive to meet.

This year, U.S. refiners are required to blend 13.8 billion gallons of ethanol into the fuel they sell to domestic customers. In their calculations when crafting the bill in 2007, lawmakers assumed gasoline demand would continue to rise and that refiners would need all that ethanol to make up 10 percent of the fuel sold to motorists. The problem is that U.S. drivers are consuming less, not more, gasoline because they’re driving fewer miles in increasingly fuel-efficient vehicles. As a result, refiners don’t need all the ethanol the government forces them to buy. To make up the roughly 400 million gallon difference between the ethanol the industry needs and the amount the government mandates, refiners must buy credits called Renewable Identification Numbers, or RINs. The end result is that refiners have an even greater incentive to sell their fuel abroad, where it isn’t subject to U.S. ethanol requirements.

In late 2011 the U.S. surpassed Russia as the largest exporter of such refined products as gasoline and diesel. Without realizing it, U.S. drivers are competing for American-made gasoline with consumers in Latin America and Asia, where demand is rising.

Exports have continued to rise in 2013. In March the U.S. shipped out a record 3.2 million barrels a day of refined fuel (see chart above, data here). “The tools are in place for the U.S. to become an even bigger exporter of gasoline and diesel,” says Stephen Schork, president of the energy consulting firm Schork Group. “The U.S. has the most sophisticated network and the most technologically advanced refining system in the world, and it has access to a tremendous amount of domestically produced crude oil in a country where demand is stagnant at best.”

All of this means that while U.S. oil production is forecast to rise this year, much of it will be refined into gasoline or diesel for the new drivers of Brazil, India, and China. As long as U.S. refiners export their fuel, U.S. drivers will be competing for gasoline with their counterparts elsewhere in the world.

Bottom line: U.S. refiners of gasoline and other fuel are increasingly going after global market share rather than selling to the home.

MP: This article highlights one more reason that ethanol and the Renewable Fuel Standards are terrible public policy – they are contributing to increased incentives to export US fuel and finished petroleum products, which is reflected in higher prices at the pump for American consumers. So the next time you’re frustrated with high gasoline prices, don’t blame “Big Oil.” Blame the real culprit – “Big Corn.”