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May 30, 2018
Global Oil Markets and U.S. Gasoline Prices 2018
As the 2018 U.S. summer driving season begins, crude oil
150,000 bpd from the fourth quarter of 2017 through the
and gasoline prices have reached their highest levels since
first quarter of 2018. One oil market development that has
2014. The international crude oil price benchmark (Brent)
been directly affecting global supply is an oil production
has increased by approximately 20% since the start of the
agreement between the Organization of the Petroleum
year, with spot prices reaching just over $80 per barrel in
Exporting Countries (OPEC) and several other oil
mid-May. As a result, average U.S. retail gasoline prices—
producing countries. In November 2016, 11 of the then-
including taxes—have reached $2.99 per gallon (see Figure
active 13 OPEC members (Libya and Nigeria were exempt)
1). Currently, crude oil contributes close to 60% of the price
announced an agreement to reduce oil production by
of gasoline. The remaining 40% is from refining,
approximately 1.2 million bpd (Iran was allowed a small
distribution and marketing, and taxes. Prices for other
increase) from October 2016 levels. The following month
petroleum products such as diesel fuel and kerosene have
OPEC announced that 11 non-OPEC countries, led by
risen as well.
Russia, had agreed to reduce oil production by an additional
560,000 bpd. This “Declaration of Cooperation” by 22
Numerous factors can impact oil and petroleum product
countries to reduce oil production by approximately 1.8
prices. Price drivers explored in this In Focus, namely
million bpd came into effect in January 2017 and is
market fundamentals (supply, demand, and stocks) and
currently scheduled to expire at the end of 2018. The
geopolitical risks, affect the nearly 100 million barrels per
agreement has been extended twice.
day (bpd) global market. However, other factors such as the
strength of the U.S. dollar, global spare production
Group-level compliance with the OPEC/Non-OPEC
capacity, and financial market expectations can also impact
agreement has exceeded the commitment, and oil
price levels.
production by the parties has been reduced by
approximately 1.9 million barrels per day since the
Figure 1. U.S. Average Retail Gasoline Prices
agreement took effect. A large portion of this “over-
Nominal Dollars
compliance” is due to unanticipated production declines in
Venezuela (discussed further below).
Counter-balancing the OPEC supply reduction to some
degree, U.S. oil production has risen month-over-month by
1.4 million bpd between January 2017 and February 2018.
Higher oil prices have benefited U.S. oil producers and are
providing incentives to further increase production.
Demand
In its May report, the International Energy Agency (IEA)
projected 2018 global oil demand to increase by 1.4 million
bpd compared to 2017. While this was a downward revision
of 100,000 bpd from the April report—attributed to
anticipated demand declines from higher prices—demand
growth in 2018 is expected to be relatively high. This
Source: Energy Information Administration
demand increase is driven primarily by the high growth rate
Oil and Petroleum Product Market
of worldwide gross domestic product (GDP), which the
Fundamentals
International Monetary Fund (IMF) estimates to be 3.9%
for both 2018 and 2019.
Fundamental factors affecting the price of crude oil and
petroleum products include global supply and demand, and
Stocks
the amount of, and changes to, global oil and petroleum
The difference between supply and demand is reflected in
product stocks. According to the U.S. Energy Information
stock changes. However, information about global stock
Administration (EIA), since the beginning of 2018 global
levels is limited and stock levels for Organization for
supply has declined, demand has increased, and inventories
Economic Co-operation and Development (OECD)
have been subsequently reduced. Each of these changes to
countries is typically the metric used to gauge global stock
market fundamentals has resulted in upward price pressure
changes. One of the stated goals of the OPEC/Non-OPEC
that is reflected in current oil and gasoline prices.
production agreement was to reduce stock levels, which had
reached record levels in 2016, back to their five-year
Supply
average. Since the OPEC/Non-OPEC production agreement
On a quarterly basis, EIA reports that world oil and
took effect, OECD crude oil and petroleum product stock
petroleum liquids production declined by approximately
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Global Oil Markets and U.S. Gasoline Prices 2018
levels declined by 230 million barrels (8.3%). In February
in place prior to the 2015 Joint Comprehensive Plan of
2018, OECD stock levels were approximately 2.5 billion
Action (JCPOA). For global oil markets, the most relevant
barrels (see Figure 2).
of these sanctions are those aimed at reducing Iran’s oil
exports. The legal framework of these sanctions provides an
Figure 2. OECD Crude Oil and Petroleum Product
incentive for oil buyers to “significantly reduce” purchases
Stocks
of Iranian oil. Between 2012 and 2015—when these
sanctions were in effect—Iran crude oil production declined
by approximately 1 million bpd. Iran oil production has
since returned to pre-sanction levels of approximately 3.8
million bpd. Exactly how Iran crude oil production might
be affected by the reinstatement of oil sector sanctions is
uncertain. Current estimates suggest that Iran crude oil
production could be reduced by as little as 100,000 bpd or
as much as 1 million bpd. Nevertheless, should Iran oil
production decline the resulting effect would likely be
upward price pressure.
Policy Considerations
During periods of escalating oil and petroleum product
prices there is generally broad congressional interest in
Source: International Energy Agency
exploring policies that might provide some degree of price
relief for U.S. consumers. In April, EIA reported that higher
gasoline price projections would “result in the average U.S.
IEA reported in May that OECD stocks had reached the
household spending about $190 more on motor fuel in
five-year average. Based on this metric, the OPEC/Non-
2018.” In May, the House Judiciary Committee held a
OPEC agreement has arguably achieved its objective.
hearing regarding the proposed No Oil Producing and
However, indications from OPEC members suggest that the
Exporting Cartels Act (NOPEC). Subsequently introduced
organization may change the metric used to determine the
as H.R. 5904, the bill would amend the Sherman Act to
success of the production agreement.
make oil producing and exporting cartels illegal.
Geopolitical Risk Factors
Additional bills have been introduced in the 115th Congress
Global events with the potential to impact oil and petroleum
that can generally be categorized as efforts to address rising
product supply, demand, and trade can also affect price
gasoline prices. S. 2929 would require the U.S. Trade
levels, especially in the short term when financial market
Representative to pursue a complaint of anticompetitive
sentiment can be influenced by risks and uncertainty. While
practices against certain oil exporting countries. S. 2886
developments in Syria, Yemen, and North Korea are
would reinstate restrictions on the export of crude oil and
significant factors, evolving situations in Venezuela and
natural gas produced in the United States. Crude oil export
Iran, two major oil producers, could have a direct impact on
restrictions were repealed in December 2015.
short-term oil market conditions, including prices. Existing
sanctions on Russia’s energy sector will likely have limited
Conclusion
short-term impacts and are therefore not discussed in this In
Generally, recent oil market trends and geopolitical factors
Focus.
have contributed to price escalation since the start of 2018.
Venezuela
However, while current market fundamental data indicate
demand has been exceeding supply, stock levels have
Venezuela is in the midst of a political and economic crisis
declined, and prices have increased, current EIA projections
that has contributed to a steep crude oil production decline.
for the remainder of 2018 and all of 2019 suggest that the
Since January 2016, crude oil production fell by nearly 1
situation may reverse and supply could potentially exceed
million bpd month-over-month. Under the OPEC/Non-
demand. Two assumptions contributing to this supply
OPEC agreement, Venezuela was to reduce production by
surplus projection include continued U.S. oil production
100,000 bpd from its October 2016 reference level of
growth and unwinding the OPEC/Non-OPEC agreement
approximately 2.1 million bpd. In April 2018, the actual
when it expires at the end of 2018. EIA projections are
reduction compared to the reference level was 650,000
subject to revision as market conditions change and
barrels per day. Further, the IEA projects that Venezuela
geopolitical risks evolve. Should this occur, market
production may decline through the end of 2018 by an
fundamentals would be expected to exert downward
additional 400,000 bpd. Should this projection materialize,
pressure on oil and petroleum product prices.
there would likely be upward pressure on global oil prices.
Additionally, the Trump Administration has indicated that it
is considering petroleum sector sanctions on Venezuela.
Phillip Brown, Specialist in Energy Policy
Depending on the structure of these potential sanctions,
Robert Pirog, Specialist in Energy Economics
Venezuelan oil production could possibly decline further.
IF10897
Iran
On May 8, 2018, President Trump announced that the
Administration would reinstate all U.S. sanctions that were
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Global Oil Markets and U.S. Gasoline Prices 2018
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