The time has come to once and for all put to rest the notion that crude oil and gasoline are joined at the hip as commodities in solidarity.
Yes, there’s a thin veil of truth to the myth, born of the fact that the latter is refined from the former. But for all practical purposes, it’s prudent to consider each separately from the other. The reason: each is driven by a separate, and at times dissimilar set of supply and demand factors.
Still, the two appear to share a commonality in pricing trend at times, promoting the illusion of equality. But as the news from Iran reminds, the danger in the conceit carries more than a little risk for clear thinking on energy matters.
The casual observer may wonder why Iran, home to 10% of the world’s proven oil reserves and second in global crude production, has started rationing gasoline, which has sparked riots and unrest in the country. In fact, there’s no great mystery here.
Iran produces far more crude oil than it consumes domestically, thus its high level of exports. But its domestic gasoline production falls well short of internal demand. The reason should be familiar to Americans, namely, a lack of investment in refineries to slake rising consumption.
Iran in 2005 imported roughly one-third of its domestic gasoline consumption of 400,000 barrels a day, according to the Energy Information Agency. In an odd twist of fate, reliance on foreign gasoline makes Iran the world’s second-largest importer of the fuel after the United States.
Adding to Iran’s challenge in solving its gasoline shortage is the fact that the state imposes price caps on the fuel, thereby insulating the population from the market price for a commodity that’s set globally by supply and demand forces. As a result, Tehran buys foreign gasoline for $2 a gallon and sells it domestically for 34 cents, The New York Times reported via The Houston Chronicle. In addition to the ill-advised policy of promoting consumption while domestic production is, at best, static, state subsidized gasoline plants the seeds for social strife for the day when market forces inevitably shatter the myth that energy’s inexpensive.
The moral of the story: access to large quantities of crude oil doesn’t necessarily translate into energy security for the man on the street. That truism doesn’t stop some, if not most Iranians from letting expectations run away from the reality on the ground.
“There is no reason why we should pay the same price as people outside Iran do,” Amir Aram, a carpenter in Tehran, told the Times. “We have all this oil beneath our feet and have to wait for hours in line to get our ration.”
Politicians in Washington would do well to study the current Iranian energy crisis and recognize the distinction between the markets for crude oil and gasoline and the separate but independent challenges looming in each for the United States. Yes, each commodity requires sober analysis and planning. But however that unfolds, accepting that the two aren’t interchangeable for policy making is essential.
The U.S. could have all the inexpensive oil in the world, but that alone doesn’t put gasoline in Joe Sixpack’s SUV tank. We can and should have an intelligent national debate about the country’s long-term energy strategy. (Hey, there’s a first time for everything.) But no matter the path we take, the choice must flow from a firm grasp of the facts. That begins with understanding the supply/demand dynamic that is the U.S. gasoline market.
* Fact number 1: There were 149 operating refineries in these United States in 2006–down 50% from 1982, according to EIA.
* Fact number 2: the capacity of the operating U.S. refineries has fallen by 3.7% during 1982-2006.
* Fact number 3: motor gasoline consumption in the U.S. increased by 40% in 2006 vs. 1982.
* Fact number 4: gasoline imports to the U.S. have climbed by 140% during 1982-2006.
On the surface, the above stats don’t look all that different from the dynamic of crude oil, i.e., rising consumption, falling domestic production, increasing reliance on imports. The difference is that geology has imposed its reality on the U.S. when it comes to oil. In sharp contrast, whatever awaits for gasoline in this country will come solely as a self-inflicted scenario, a fact that Iran understands all too well these days.