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