Breakout

Falling Energy Prices: Good for Jobs, Not as Good for Gasoline

Jeff Macke
Breakout

Americans suspect one of two things about oil and gas prices: crude is either getting propped up by "speculators" or through the actions of Big Business. In either case, prices at the pump are inflated by capitalism run amok, to the detriment of the American consumer.

It's not exactly wrong, but there's another side to the relationship between energy and profit-seeking—one that's bringing jobs back to the U.S.

In the attached video, David Lutz managing director at Stifel Nicolaus lays out the big picture, starting with why the price of crude oil seems to fall while gas prices either stay where they are or move higher. Lutz says the price of oil is declining because of the "glut of oil we have in the United States."

Yes, we have too much oil and the price is falling. But that's only in the U.S., where we quote the price of West Texas Intermediate (WTI) crude. "Brent is the global benchmark for oil," explains Lutz. In that case, the price of WTI has less of an impact on gasoline than generally assumed—which isn't to say corporate America isn't doing its part.

"Refiners here in the country are taking cheap WTI and refining it into diesel or petrol, then they're shipping it overseas." Plainly put: Big Oil doesn't artificially inflate gas prices at all; it simply maximizes profits. For a variety of reasons, both corporate and political, there are too few refineries in the U.S. to meet the demand for Europe's gas mix and the type of gas used in American cars.

Refiners have constraints on the amount of fuel they can sell, so they go where they can get the most profit, namely Europe and Asia.

"Unfortunately, it stops us from being able to capture this big drop we've been seeing in WTI."

Despite this inefficiency, Lutz sees gas prices trending back toward the longer-term average of around $3.50 per gallon from just under the $3.88 paid on average in the U.S. The catalysts for this will be if Americans drive less, the usage of more efficient cars, and if some shuttered east coast refiners come back online.

The irony of our complaints about high gas prices is that we're sitting, standing, and even driving over a solution to the problem every day. America is the Saudi Arabia of natural gas. The U.S. produces far more of it than we can use, driving prices of natty to 11-year lows near $1.90/btu.

It's not an apples-to-apples comparison, but running a car on natural gas is about 40% more efficient than the traditional engine. Natural gas also burns more cleanly and could end our reliance on foreign oil. Natty's also more dangerous and expensive to ship than crude, meaning refiners would maximize profits by keeping what they refine here.

The same lunacy that keeps America from converting to natural gas vehicles keeps natty prices low. Lower natural gas prices entered into the same maximum profit equation that keeps prices at the pump high, which results in companies saving money by using natural gas to fuel factories and plants.

The reduced energy prices created by our natural gas glut reduces the cost of manufacturing in the U.S. Combined with the cost of shipping goods from Asia, the lower cost of fuel means it's a better deal for corporations to bring jobs back home, despite the demand for higher salaries.

U.S. auto exports are rising at levels not seen since 2007, when global sales were higher than they are now. Honda recently announced a new U.S. plant. General Electric announced more jobs being transferred to the U.S. as part of a cost-saving initiative. Hiring a few thousand here and there starts to add up, helping to create jobs.

These are real jobs being created largely because the U.S. refuses to use local resources to reduce our prices at the pump.

Free market forces are never as simple as they seem. Given where we are politically, optimized capitalism (i.e., companies acting as greedily as they can) creates jobs even as it rips money out of our wallets when we fill 'er up. Between jobs and cheap driving, society is choosing jobs.

As is so often the case, when blaming someone else for a problem, it's at least partially our own damn fault.

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