I recently filled up for $2.93 a gallon and I must admit feeling a twinge of elation that gasoline prices had dipped below $3.
The feeling was fleeting.
Pump prices may finally be coming down, but the modest declines cap a year that has been the costliest ever for U.S. motorists. GasBuddy, which tracks pump prices, found recently that the average price for regular unleaded nationally was $3.63 a gallon so far this year, and that comes on top of an average of $3.51 last year, which was also a record.
(Tuesday, the average price in Houston was $3.15 a gallon, according to AAA.)
Now, on the one hand, this shouldn’t surprise us.
The average price for a barrel of crude oil has increased about 23 percent, to $85.79 from $69.51, in the past three years.
More surprising is that oil and gasoline prices have been rising in tandem with increases in domestic production. This wasn’t supposed to happen. We are greeted almost weekly, after all, by some new prediction that the U.S. or North America is on the cusp of “energy independence.”
On Tuesday, for example, Exxon Mobil released its long-term energy outlook, which predicts North America will become a net energy exporter by 2025. That follows a report by the International Energy Agency a few weeks ago that grabbed headlines by predicting that U.S. oil production will surpass Saudi Arabia by 2020.
Both reports credit hydraulic fracturing with reversing years of declining domestic production. In September, the U.S. Energy Information Administration said domestic daily production had reached its highest in 15 years and predicted it would keep rising.
While the weak economy has kept U.S. energy demand in check, prices have increased because if oil companies can’t sell refined products such as gasoline here, they can find ready buyers overseas. Oil, after all, is a global market.
“The gas station at Kirby and the Southwest Freeway is competing with Japan to buy that gasoline,” said Ed Hirs, a professor of energy economics at the University of Houston.
And that isn’t going to change. In fact, the international competition for oil and petroleum products is likely to intensify.
The same IEA report that predicted our production would outpace Saudi Arabia’s in less than a decade also predicted that demand from emerging markets such as China, India, and even Middle Eastern oil-producing countries, will continue to grow at a faster pace than world production will increase.
Those emerging economies, quite simply, are going to keep sopping up the world’s oil at a far faster rate than the U.S. is going to be able to increase production – even if it meets the production forecasts found in reports such as Exxon Mobil’s and the IEA’s.
That’s not all bad. Those higher global prices that are encouraging the wave of new drilling here at home, from offshore development to the shale plays onshore. That, in turn, is creating jobs, promoting more efficient drilling technology and, in the long run, giving us a fighting chance at meeting that increased global energy demand in the future.
“That’s what encouraging these producers to dive into new frontiers,” said Ken Medlock, an economics professor at Rice University and senior director for the Baker Institute’s Center for Energy Studies. “All signals are that demand is going to outgrow supply if we don’t do something new.”
In the U.S., “something new” also means more fuel-efficient vehicles and hybrids, which we’re already seeing hit the market, and vehicles that run on alternative fuels such as natural gas and electricity, which are further off.
That doesn’t mean our efforts to increase domestic production are fruitless. After all, we are ultimately competing for a dwindling supply of available oil in the world, which means the more we can produce here, the better.
But it also may mean that whatever we produce here will continue to rise in price over time. American motorists continue to compete for fuel against a growing tide of demand for a relatively static supply of oil.
So enjoy sub-$3 gasoline while you can, but don’t get too used to it.