Why gas prices remain static despite oil production surge

Although US oil production has increased to 16.8 million barrels of crude per day, gas prices are projected to stay static in the near future. The volume of oil may be high, but experts say the growth of overall global demand is just as high, if not higher.

By , OilPrice.com

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    Austin Mitchell, left, and Ryan Lehto, work on an oil derrick outside of Williston, N.D., July 26, 2011. Although US oil production has increased to 16.8 million barrels of crude per day, gas prices will stay static in the near future.
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The price of gasoline in the United States will remain fairly static for the immediate future, even though refineries are working at record levels because of the surge in oil production.

The US Energy Information Agency (EIA) said July 24 in its weekly petroleum report that refineries took in 16.8 million barrels of crude per day for the previous two weeks, more than the last record set in 2005.

The refining output broke the old record in the week of July 13 with input levels at 16.6 million barrels a day, particularly at refineries in the Midwest and the Gulf coast, the EIA said. This was the highest level it recorded since 1989.

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The record high for midwestern refineries was 3.8 million barrels per day for the week ending July 11 the report said. Gulf Coast refineries took in 8.5 million barrels per day in the week ending June 27 and 8.7 million barrels per day for each of the two subsequent weeks.

Much of this, of course, is thanks to the increased extraction of crude in the United States and Canada, particularly because of oil companies' growing reliance on horizontal drilling and hydraulic fracturing, or fracking, to reach oil deposits that are otherwise inaccessible, Andy Lipow, a Houston-based oil industry consultant and president of Lipow Oil Associates LLC, told the International Business Times.

This surge in supply also has lowered costs for refinery operators, simply because domestic crude is less expensive than imported oil. At the same time, Lipow said, Gulf Coast refineries have expanded over the past few years and can increase their volume, keeping prices even lower. And their electricity costs are declining because it's generated by low-cost natural gas. (Related Article: Gas Prices Soar, But Have Probably Peaked For Now)

Lipow said all this combines to make US refineries increasingly competitive with foreign rivals, including those in Africa, Europe and South America.

Yet despite this volume, the growth of overall global demand for oil products is matching the growth in oil stocks, so don't expect retail prices for oil products to drop. Plus, refiners are jumping on the opportunity to increase profits, according to Donald Morton, a senior vice president at the investment bank Herbert J. Sims & Co.

"We're pumping a lot of juice – these refineries are running hard," Morton told The Wall Street Journal. "They've still got good profit margins. They're trying to take advantage of it as much as they can."

At the same time, don't expect US pump prices to go up soon, either. Demand for gasoline in the United States ordinarily rises during the summer travel months, but increased capacity at many refineries is meeting that demand, with plenty left over for use later in the year, when demand lessens.
"We've got adequate inventories … already in the storage pool," Morton said.

Source: http://oilprice.com/Latest-Energy-News/World-News/Gas-Prices-Dont-Reflect-Record-Levels-Of-U.S.-Refinery-Output.html

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