Supply and Downward Pressure on Crude Prices

Mark Green
Posted July 18, 2013

Take a look at the chart below, a compilation by BP of the history of modern crude oil prices and the historical events that have accompanied dramatic price shifts: 

The take-away is simple: Events that impact or could impact supply affect the global crude oil market. And, because the cost of crude is the main driver of gasoline prices – currently about 66 percent of the price at the pump – events that affect crude supplies and costs must be acknowledged in a discussion of gasoline prices. Here are some of the factors currently affecting crude prices:

• Egyptian crisis – Though not a big oil producer, Egypt sits astride the Suez Canal, through which about 4 million barrels of crude and other petroleum products are transported every day. Unrest could disrupt that flow and affect global supply.
• Threat of crisis – Events in Egypt could spread to other countries in the Middle East and North Africa – home to about one-third of the world’s oil production.
• Economic growth – The U.S. economy added 195,000 jobs in June, indicating it is strengthening and will need increased energy supplies.

There are other factors, such as the relative level of U.S. crude stockpiles and changes in refinery capacity. But, again, overall crude supply is the big factor. It stands to reason, then, that anything the United States can do to increase supply will help put downward pressure on crude prices. Here’s a short list of pro-development, pro-supply policies:

Increase U.S. oil production

With increased access to U.S. reserves onshore and offshore, America’s oil and natural gas companies can find more oil and bring more of it to market. Areas include the 1002 Area within the Arctic National Wildlife Refuge and portions of the Rocky Mountains. Offshore is especially critical, with about 87 percent of federal acreage off our coasts off-limits to development – including the Atlantic and Pacific outer continental shelf areas and the eastern Gulf of Mexico.

Approve and build the full Keystone XL pipeline

The Keystone XL has been under federal review for nearly five years. In the time the administration has spent delaying the project, the pipeline could have been built twice already. Also delayed: job creation, economic growth and increased U.S. energy security through a stronger energy partnership with Canada, our No. 1 supplier of imported crude. This is why 82 percent of Americans believe the pipeline is in the national interest, and more generally, why the project enjoys overwhelming support in the U.S.

Common-sense approach to regulatory policy

We need regulation that’s transparent, is based on sound economic analysis and that avoids unnecessary duplication – and therefore helps foster more production. It starts with rejecting measures that could unnecessarily increase costs, such as proposed Tier 3 rules that could add up to 9 cents per gallon to the cost of making gasoline. It also means repealing the Renewable Fuel Standard, whose mandates for increasing use of ethanol in the fuel supply could increase the cost of making gasoline – up to 30 percent in 2015 – according to NERA Economic Consulting’s study.