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Amidst Drilling Boom, Average Price For U.S. Gasoline Hit Record High In 2012

By Stephen Lacey  

"Amidst Drilling Boom, Average Price For U.S. Gasoline Hit Record High In 2012"

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The U.S. is experiencing a domestic oil boom that could soon make it the world’s largest liquid fuels producer. And how has that surge in production impacted gasoline prices?

In 2012, Americans paid more for gasoline than ever before.

According to figures from AAA, the average price of gasoline in 2012 was $3.60 per gallon, making last year the most expensive in history. Here’s what the organization reported on December 31:

Today’s national average price for a gallon of regular unleaded gasoline is $3.29. While this price is more than 10 cents less than one month ago, it is 4.5 cents more expensive than one week ago and 1.6 cents more than one year ago. The year ended with an annual average of $3.60 per gallon – the highest on record and nine cents more expensive than the previous high of $3.51 in 2011.

In 2012, prices increased to begin the year as geopolitical tension with Iran mounted and the “fear premium” in oil markets propelled the national average price at the pump to a high of $3.94 on April 5 and 6 – more than 65 cents higher than the price to begin the year. While a resolution to the “fiscal cliff” negotiations in Washington could pressure gasoline prices higher to begin 2013, it is unlikely that this increase would be on par with a year ago. Continued economic concerns, weak demand and increased domestic crude oil production are likely to temper any seasonal price increase in the coming months.

High gas prices caused a fever pitch in political circles. The 2012 campaign season was filled with calls for a “drill-everywhere-drill-anything” approach to energy policy. During the February primary season, Republican presidential candidate Newt Gingrich released a plan to increase drilling and shut down the Environmental Protection Agency, which he claimed would lower gas prices to $2.50 per gallon. Analysts called it “absurd.”

During the general election, Mitt Romney unveiled an energy plan to “drill everywhere it can be done.” While Romney didn’t make any specific claims about how much it would lower prices at the pump, he did claim his plan would substantially lower prices for consumers.

However, while Romney and others made bold claims about how much their drilling plans would reduce gasoline prices, the opposite scenario played out: American oil production surged to historic highs; yet the average price of gasoline hovered at record levels for consumers. The year closed out as the most expensive ever for gasoline.

That’s not to say that an increase in U.S. oil production failed to have an impact. As AAA points out, prices remained high for a variety of reasons, including tensions with Iran and domestic refinery constraints. While it’s difficult to know the exact influence of domestic production on U.S. gasoline prices, the drilling boom likely helped keep prices from going much higher in 2012 than they might have otherwise, said Michael Levi, a senior fellow with the Council on Foreign Relations.

“In the short run, unexpected production gains can have a big impact on prices,” Levi told Climate Progress.

Levi said that the increase in U.S. production — along with other countries — probably helped moderate price increases after Iranian sanctions were tightened last year. However, he said it’s “borderline impossible” to know how much U.S. oil production offset price increases.

“I think it’s tougher for U.S. production to move prices strongly in the long run,” said Levi.

That’s because projections assume that OPEC will cut oil production in response to increased U.S. supply, which is why analysts typically predict a “very mild price impact from any change in U.S. production,” said Levi.

Another emerging factor — one that is usually unmentioned in political calls for “drill-baby-drill” — is the decrease in demand for oil in America. Due to improved automobile efficiency, a decrease in vehicle miles traveled, and the economic slump, U.S. petroleum consumption has fallen since 2005. That has also played a role in preventing a steeper rise in gasoline prices. The International Energy Agency expects U.S. consumption to fall by about one million barrels per day by 2020 and five million barrels a day by 2035.

Experts say reducing consumption is the best way to protect consumers. In May of last year, the Congressional Budget Office issued a report finding that efficiency and conservation were the most effective tools for reducing consumer exposure to price increases — not more production.

“Even if the United States increased production and became a net exporter of oil, U.S. consumers would still be exposed to gasoline prices that rose and fell in response to disruptions around the world,” concluded the report.

And this analysis doesn’t take into account the greatest security and cost threat of all: the global warming impact of unchecked fossil fuel development. According to the International Energy Agency, the world needs to leave two-thirds of proven fossil fuel reserves in the ground to avoid catastrophic climate change.

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7 Responses to Amidst Drilling Boom, Average Price For U.S. Gasoline Hit Record High In 2012

  1. Americans have a deep supply-side bias. It stems in part from our mythologized self-image as a can-do people who pass on better living standards to the next generation.

    In other words, we have a deep bias for growth.

    We also have a strong cultural bias for bigger, faster, louder, and more powerful. Think Tim “Tool Time” Taylor from the old TV sitcom, Home Improvement. It’s deeply connected to American male identity.

    In a world of finite resources, reduced demand is the obvious answer to high gasoline prices. To do that will require some cultural shifts. The challenge: how to make efficiency manly? Or at least neutralize that cultural baggage?

    I think the can-do heritage is a big part. What other cultural attitudes can be re-channeled?

    • Mulga Mumblebrain says:

      A neoplastic tumour has a ‘..deep bias for growth’, too. We are, supposedly, superior to tumours because we have brains and can weigh up the costs and benefits of our actions. Supposedly.

  2. Michael Berndtson says:

    My guess is that domestic (and Canadian) oil from tar sands, shale and deep-water offshore couldn’t be produced if prices were any lower at the pump. So this way gas stations, distributors, blenders, refined product pipeliners, refiners, crude oil pipeliners, well field and mine operators, investors, commodity traders, Hedge Funds, non-profit security and energy experts can take a cut from a gallon of gasoline or diesel purchased at the pump by you and me.

    It’s also a pretty good indicator of peak oil – or at least demonstrates we’re doing everything we can to wring out the last drop from the earth – no matter the cost.

  3. Mike says:

    This “domestic oil boom” is taking place precisely because gas (= petrol and diesel?) prices are high. The expansion in crude production is made possible by the very costly process of hydraulic fracturing, or fracking. Production from fracking wells is only worthwhile if the price of crude is high. If the price falls, production, or at least drilling new wells, will decline. You have to know that the productive life of a fracking well is short – (and nasty and brutish) so that its peak production is reached within a year or two and then production falls off rapidly within a few years. There is no way that the US will achieve the neo-con wet dreams of energy independence anytime in the future. Simply to maintain production at the current levels, new wells will have to be drilled to replace the rapidly falling production from existing wells, and to reach Saudi Arabia levels of production by say 2030, the US will have to be drilling new wells at an exponential rate using more rigs than exist in the whole world today. The gas (i.e. natural fracked gas) industry has already suffered setbacks; gas as in petrol/diesel will likewise hit the buffers. That said, though global oil production may start to decline over the next decade or so, enough hydrocarbons will be burned over the next few decades to fry the planet.

  4. Paul Klinkman says:

    We discovered years after the 2008 presidential election that the Koch brothers had rented six supertankers, filled them up and parked them in the Persian Gulf, in order to drive up the worldwide cost of oil/gasoline during the 2008 elections. This past year the Koch brothers spent a fortune on politics in general. Why would I possibly imagine that they would rent at least seven supertankers this time?

  5. Paul Klinkman says:

    It doesn’t matter that the United States is fossil self-sufficient if this country is simply exporting a big chunk of the fossils to China to pay its foreign debts. We used to call this exploitation when the USA extracted other people’s natural wealth out of their countries while paying off their elites and while polluting their people.

  6. Aussie John says:

    To put some perspective on US petrol prices, I offer the following: – (all expressed in USD per US Gallon)
    US average petrol price for 2012 was $3.60, Australian average was $5.67, Germany approx $7.50.
    Government charges/taxes inherent in the retail price represent approx 20% of retail in the US, 35% in Australia, 45% in Germany.

    US gasoline prices have long been, and are still at the low end of world average prices.

    In light of the above, it appears to me that if the US is serious about fossil fuel greenhouse gas reduction it should progressively raise US government charge/tax on petrol/diesel to at least the OECD mean; the taxes recovered to be used to recover some of the current fossil fuel industry subsidies, and to subsidise/implement urgent renewable energy programs.

    See graph (on final page):- http://www.aip.com.au/pricing/facts/Weekly_Petrol_Prices_Report.htm
    for a summary of Sept 2012 average world OECD gasoline prices.