Americas Oil and Natural Gas Industry

Whats Up With Gasoline Prices?

June 2012

For the latest report, please visit www.api.org/gasolineprices

Table of Contents

Gasoline, Diesel, and Crude Oil Prices Oil Prices Relate to Many Uncertain Factors World Liquid Fuel Consumption Growth in World Liquid Fuel Consumption OPEC Surplus Crude Oil Production Capacity Accumulating Risks to the Development of Oil and Natural Gas Sources of Crude and Product Supply Strategic Petroleum Reserve Commodity Performance West Texas Intermediate Crude in Dollars, Euros, and Yen EIA Price Forecast What Consumers are Paying for at the Gasoline Pump Gasoline Taxes by State Fuel-Saving Tips for Drivers

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Whats Up With Gasoline Prices? | June 2012

Gasoline, Diesel and Crude Oil Prices

Source: NYMEX (WTI crude oil) and AAA (gasoline and diesel).

Changes in gasoline and diesel prices mirror changes in crude oil prices.

The roller coaster rise and fall in gasoline and diesel prices over the last few years tracks changes in the cost of crude oil. Those changes are determined in the global crude oil market by the worldwide demand for and supply of crude oil. Weak economic conditions in the U.S. and around the world in 2008 and into 2009 led to less demand which helped push prices down.

With the worldwide economic recovery underway, demand is on the rise again but unrest in the Middle East and North Africa has put supplies at risk. This combination of rising demand and reduced supply helped to push prices higher.

Whats Up With Gasoline Prices? | June 2012

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Oil Prices Relate to Many Uncertain Factors

Source: EIA.

A host of factors, many of them uncertain, affect the price of crude oil and the products made from it.

Crude oil prices are set globally through the daily interactions of thousands of buyers and sellers in both physical and futures markets, and reflect participants knowledge and expectations of demand and supply.

In addition to economic growth and geopolitical risks, other factors, including weather events, inventories, exchange rates, investments, spare capacity, OPEC production decisions, and non-OPEC supply growth all figure into the price of crude oil.

Whats Up With Gasoline Prices? | June 2012

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World Liquid Fuel Consumption

Source: EIA, Short-Term Energy Outlook, June 2012.

World oil consumption is expected to grow as the global economy rebounds.

The worlds demand for oil increased sharply for several years, peaking at 86 million barrels per day in 2007. However, the global economic slowdown in recent years reversed this trend and demand fell for two consecutive years to just 85 million barrels per day in 2009, or

nearly one million barrels per day less than at its peak before rebounding in 2010. The Energy Information Administration expects growth to accelerate over the next two years reaching 89 million barrels per day in 2012 and nearly 90 million barrels per day in 2013.

Whats Up With Gasoline Prices? | June 2012

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Growth in World Liquid Fuel Consumption

Source: EIA, Short-Term Energy Outlook, June 2012.

Growth in world oil consumption is expected to be concentrated in non-OECD countries.

The EIA projects consumption in the Organization for Economic Cooperation and Development (OECD)1 countries to be nearly flat in 2012 and 2013. Growth is concentrated in the non-OECD countries including China, Brazil, and the Middle

East with gains of about .8 million barrels per day expected in 2012 and another 1 million barrels per day in 2013.

1 The 34 member countries of the OECD include: Australia Austria Belgium Canada Chile Czech Republic Denmark Estonia Finland France Germany Greece Hungary Iceland Ireland Israel Italy Japan Korea (South) Luxemburg Mexico Netherlands New Zealand Norway Poland Portugal Slovakia Slovenia Spain Sweden Switzerland Turkey United Kingdom United States

Whats Up With Gasoline Prices? | June 2012

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OPEC Surplus Crude Oil Production Capacity

Source: EIA, Short-Term Energy Outlook, June 2012.

Surplus crude oil capacity is expected to increase.

The amount of surplus crude oil capacity, which is the amount of oil available to meet surges in demand or disruptions in supply, increased in 2009 as demand for crude oil declined along with the global economic slowdown.

EIA expects OPEC surplus production capacity will increase from about 2.5 million barrels per day in 2012 to 3.4 million barrels per day at the end of 2013.

Whats Up With Gasoline Prices? | June 2012

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Accumulating Risks to the Development of Oil and Natural Gas

Source: NPC.

There are accumulating risks to the development of oil and natural gas.

The National Petroleum Council (2008) examined a broad range of global energy supply, demand and technology projections through 2030 and concluded that the world is not running out of energy resources, but there are accumulating risks to continuing expansion of oil and natural gas production from the conventional sources relied upon historically.

These risks include political instability in the Middle East and North Africa, the resurgence of resource nationalism in Latin America, civil unrest in Nigeria, piracy off the African coast, transit vulnerability in the Caspian, energy subsidies in Asia, extreme weather around the world, and restricted access to resources in the U.S. These risks create significant challenges to meeting projected energy demand.

Whats Up With Gasoline Prices? | June 2012

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U.S. Supplies of Crude and Products 2011 (18,835 Thousand Bbls per Day)
2% Columbia 2% Iraq 3% Russia 3% Mexico 2% 2% 1% Algeria Angola Kuwait 1% Ecuador

U.S. Imports of Crude and Products 2011 (8,436 Thousand Bbls per Day)
4% Algeria 4% Columbia 5% Iraq 4% Angola 2% Kuwait 2% Other

5% Venezuela

4% Nigeria

29% Canada

6% Saudi Arabia 13% Canada

55% United States

7% Russia 8% Mexico

14% Saudi Arabia 10% Nigeria 11% Venezuela

Source: EIA, Petroleum Supply Monthly, March 2012.

U.S. Supplies of Crude 2011 (14,547 Thousand Bbls per Day)

U.S. Imports of Crude 2011 (8,874 Thousand Bbls per Day)

5% Nigeria 6% Venezuela

39% United States

4% Columbia

4% Angola

21% Canada

8% Mexico 8% Saudi Arabia 15% Canada

5% Iraq 9% Nigeria

12% Saudi Arabia 10% Venezuela 12% Mexico

Source: EIA, Petroleum Supply Monthly, March 2012.

Diversifying sources of supply.

We produce 55 percent of all the oil and petroleum products we consume. The rest is imported, with most of it coming from our neighbors in North America. In fact, Canada is the largest supplier to the U.S.,

accounting for 29 percent of our imports compared to 14 percent for Saudi Arabia. One way to enhance our nations energy security is to continue to diversify our sources of supply.
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Whats Up With Gasoline Prices? | June 2012

SPR Storage Sites

The Strategic Petroleum Reserve: Americas insurance policy in case of an oil supply disruption.

The Strategic Petroleum Reserve (SPR), the worlds largest supply of emergency crude oil, was designed to protect the country from fuel shortages in the event of an emergency. Although the need for a reserve had been recognized for decades, it was the 1973-74 oil embargo by Arab nations which significantly affected the nations economy that led to its creation in 1975. The oil in the reserve is stored in underground salt caverns along the coastlines of Texas and Louisiana. Its more than 700 million barrels the largest emergency oil stockpile in the world make it a significant deterrent to oil import cutoffs. Under the Energy Policy and Conservation Act, the president is authorized to withdraw crude oil from the SPR in an energy emergency to counter a severe supply interruption and distribute it by competitive sale. The SPR has been used under these circumstances three times (during Operation Desert Storm in 1991, after Hurricane Katrina in 2005, and in response to the loss of Libyan crude in 2011).

In addition to energy emergencies, crude oil has been withdrawn from the reserve for a variety of reasons, including test sales, exchange arrangements with private companies, and as authorized by Congress to raise revenue. The SPR was not intended to be used to interfere with the crude oil or gasoline markets or to ease temporary retail fuel price hikes. According to the Congressional Research Service (CRS), it is unclear what sort of effect a draw on the SPR would have in a market where there is no actual physical shortage because oil companies may have limited interest in SPR oil unless they have spare refining capacity to turn the crude into useful products, or want to build stocks.2 The CRS also noted that it is possible that producing nations might reduce production to offset any SPR oil delivered into the market.
2 CRS, The Strategic Petroleum Reserves: History, Perspectives, and Issues, April 18, 2009.

Whats Up With Gasoline Prices? | June 2012

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Changes in the Price of Natural Gas and Crude Oil

Source: NYMEX Crude Oil, Natural Gas and EIA.

Commodity performance year to date, January 1 through June 14, 2012

Source: Bloomberg Finance LP (data as of COB 6/14), Deutsche Bank

Oil is a commodity and changes in the price of oil are similar to changes in prices of other commodities.
Whats Up With Gasoline Prices? | June 2012

Changes in commodity prices early in 2012 reflect domestic and worldwide supply and demand conditions. In the U.S., record natural gas production and a warm winter have contributed to the

fall in natural gas prices. Prices for WTI and Brent crude are down. Most of the commodities surveyed are showing declines so far this year.

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Percent Change of West Texas Intermediate Crude (WTI) in Dollars and Euros (January 1, 2007 June 21, 2012)

Percent Change of West Texas Intermediate Crude (WTI) in Dollars and Yen (January 1, 2007 June 21, 2012)

+43.88%

+43.88%

+51.30%

-4.77%

January 2007

June 2012

January 2007

June 2012

Source: Federal Reserve Bank of St. Louis, EIA, NYMEX.

The value of the dollar makes a difference.

The value of the U.S. dollar against other countries around the world means that American consumers are more affected by rising crude oil prices than the citizens of other countries that use currencies like the Yen but similar to those who use the Euro.

As oil prices have gone up all around the world, the price increase has been less for countries that have a strong currency other than the U.S. dollar, but more for those who dont.

Whats Up With Gasoline Prices? | June 2012

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EIA Price Forecast

Year 2012 Projected 96.80 2013 Projected 97.00

Gasolineb
($/gallon)

2.78

3.53

3.56

3.51

Dieselc

($/gallon)

2.99

3.84

3.90

3.87

Heating Oild
($/gallon)

2.96

3.68

3.71

3.65

Natural Gasd
($/mcf)

11.37

10.79

10.44

10.48

Electricityd
(/kwh)
a b

11.54

11.79

11.93

11.60

West Texas Intermediate

Average Regular Pump Price

On-Highway Retail

Residential Average

Source: EIA, Short-Term Energy Outlook, June 2012.

Looking ahead: EIAs price forecast.

Looking ahead the Energy Information Administration projects the annual price of WTI crude will increase from an average of $95 per barrel in 2011 to around $97 per barrel in 2012 and 2013.

EIA expects higher crude oil prices in 2012 will be passed on to all petroleum prices with retail gasoline prices expected to average a few cents per gallon more than last year.

Whats Up With Gasoline Prices? | June 2012

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What Consumers are Paying for at the Gasoline Pump (as of April 2012)

66%

15%

11% 8%

Crude Oil

Refining

Excise Tax

Transportation and Retailing

Source: EIA estimate based on average price $3.90 per gallon. April 2012

Pump prices: A fractional story.

The biggest single component of retail gasoline prices is the cost of the raw material used to produce the gasoline crude oil. That price has been between $80 and $120 a barrel, depending on the type of crude oil purchased. With crude oil at these prices a standard 42 gallon barrel translates to $1.90 to $2.85 a gallon at the pump. Excise taxes add another 50 cents a gallon on average nationwide. So the

price for gasoline is already at $2.40 or more per gallon even before adding the cost of refining, transporting, and selling the gasoline at retail outlets. Crude oil costs account for about 66 percent of what people are paying at the pump. Excise taxes average 11 percent. That leaves just 23 percent for the refiners, distributors, and retailers.

Whats Up With Gasoline Prices? | June 2012

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Gasoline Taxes (Combined Local, State and Federal Cents per Gallon, April 2012)

Source: API.

One reason the price of gasoline can vary by state is the fact that the taxes often do.

The average nationwide tax collected on each gallon of gasoline sold at the retail station is 49.5 cents. Of that, 18.4 cents per gallon goes to the federal government; the rest ends up in state and local government coffers. The amount of gasoline taxes collected by states can vary widely, from just 26.4 cents per gallon in Alaska, to as much as 69.6 cents per gallon in New York.

In addition to excise taxes, other taxes can also apply, such as sales taxes, gross receipts taxes, oil inspection fees, county and local taxes, underground storage tank fees, and other miscellaneous environmental fees. These additional taxes contribute to the difference collected among states.

Whats Up With Gasoline Prices? | June 2012

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Simple Tips to Save Fuel

Fuel-saving tips for drivers.

We count on our cars to get us where we want to go, when we want to go. That sense of freedom is important to us, but we also want to be sure we do our best to conserve natural resources for future generations. Here are a few simple steps you can take to meet these goals. Have your car tuned regularly. An engine tune-up can improve car fuel economy by an average of 1 mile per gallon. Keep your tires properly inflated. Underinflated tires can decrease fuel economy by up to 1 mile per gallon. Slow down. The faster you drive, the more gasoline your car uses. Driving at 65 miles per hour rather than 55 miles per hour reduces fuel economy by about 2 miles per gallon.

Avoid jackrabbit starts. Abrupt starts require about twice as much gasoline as gradual starts. Pace your driving. Unnecessary speedups, slowdowns and stops can decrease fuel economy by up to 2 miles per gallon. Stay alert and drive steadily, not erratically. Keep a reasonable, safe distance from the car ahead of you and anticipate traffic conditions. Use your air conditioner sparingly. The use of air conditioning can reduce fuel economy by as much as 2 miles per gallon at certain speeds and under certain operating conditions. Plan your trips in advance. Combine short trips into one to do all your errands. Avoid traveling during rush hours if possible, to reduce fuel consumption patterns such as starting and stopping and numerous idling periods. Consider joining a car pool.

Whats Up With Gasoline Prices? | June 2012

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