If Supplies Of Oil Are Up, Why Is Gas Still Pricey?

Houston Public Media News 88.7 | By Andrew Schneider,

Marilyn Geewax

Published June 20, 2013 at 2:02 AM CDT

Jim White of Pennsylvania pumps gas at a BP station in Ocala, Fla., in April. The price of gasoline remains stubbornly high, which may put a crimp on summer travel plans.

Supplies of oil have been surging this year, and U.S. drivers, who have been switching to more fuel-efficient cars, are using less gasoline.

That would seem to be the right economic combination to push down prices at the pump, but gasoline prices have remained stubbornly high this summer.

Even some people in the industry are wondering whether the law of supply and demand somehow has been repealed.

"I'm actually quite dumbfounded," says Azam Zakaria, vice president of Lone Star Petroleum, a family owned company that owns and operates 15 gas stations in the Houston area.

Zakaria, who has been in the business for nearly three decades, used to believe that more oil would mean lower prices, but he hasn't been seeing that lately.

The disconnect between supply and demand seemed to get even wider Wednesday, when the U.S. Energy Information Administration released its latest data, showing that U.S. crude oil inventories rose by 0.3 million barrels last week. Most experts had been expecting the oil inventory to decline by 0.6 million barrels.

That sort of surprise keeps happening as more and more domestic oil gets pumped. In fact last year, the United States saw the largest-ever yearly rise in oil production, according to a statistical review released last week by BP, the global oil giant.

At the same time, global oil reserves continue to grow, the BP report says.

The price of crude oil, however, continues to hover around $100 a barrel, and an average gallon of regular gasoline is still running above $3.62 nationwide. At the start of this year, the price was about $3.20 a gallon.

Zakaria worries that speculators are pushing up prices beyond what the usual balance of supply and demand would dictate. "Just to be blunt with you, I think that it's a commodity now that is being exchanged at Wall Street," he says.

Industry experts generally cite unrest in the Middle East as a key reason why oil prices remain at relatively high levels. Violence in that region could disrupt production or transport, and that makes a lot of people want to buy oil now and stockpile it.

Jim Burkhard, vice president of oil market research at IHS CERA, says he's surprised prices aren't even worse given the spreading violence from Syria's civil war.

"If you look at the turbulence in the Middle East and look at the oil price, you could wonder, 'Gee, why aren't oil prices higher?' " Burkhard says. "One very important reason why that's the case is this very strong growth in production from the United States."

But a lot of that additional domestic fuel is being turned into diesel fuel to support global trucking fleets. Matt Piotrowski, Washington bureau chief for Energy Intelligence, looks at it from the point of view of the refiners.

"If the margins are better for diesel, both inside the U.S. and also outside [refineries are] going to want to maximize their output of diesel instead of gasoline," Pietrowski said.

So this summer, U.S. drivers are faced with these realities: They're driving more fuel-efficient cars, and their country produces a lot more oil. That helps hold down gas prices. But in a world thirsty for oil — and still so dependent on producers in the turbulent Middle East — it's hard to restrain prices at the pump.