US is awash in new oil. So why are gas prices still so high?

The supply of oil and natural gas is booming in the US, but gas prices and electricity costs remain high. Even as the US posts record production, global demand and bottlenecks in supply have prevented consumers from enjoying price breaks.

Seth Perlman/AP/File
A motorist puts fuel in his car's gas tank at a service station in Springfield, Ill. US gas prices have remained at historic highs, despite a boom in domestic oil and natural gas production.

With oil and natural gas production soaring in the US, consumers might expect lower prices at the pump and on their electric bills.

But that’s not happening. The summer driving season was the fourth most expensive on record, and residential electricity costs ballooned in the first half of 2014.

Meanwhile, US oil and natural gas production surges, fueled by innovative drilling in states like Texas, North Dakota, and Pennsylvania. Today, the US is the world’s largest producer of natural gas, and oil production rivals energy giants like Russia and Saudi Arabia.

So why are American consumers paying more, even as the supply of American fuel expands? Unquenchable global demand is the problem, analysts say, along with inclement weather and infrastructure bottlenecks that have prevented burgeoning energy stores from reaching consumers.

“As along as global demand remains strong, we’re going to see gas prices in the US remain relatively expensive,” says Michael Green, spokesperson for automotive group AAA, in a telephone interview Thursday. “Places like China have really increased the amount of petroleum they use.”

AAA’s latest gas report indicates that the average gas price this summer was $3.58 per gallon, making it the fourth most expensive summer on record.

But if anything, American consumers can thank the oil boom for preventing more volatile pricing at the pump and on their electric bills.

“If we hadn’t had this boom in North American production, we’d see much higher prices,” Mr. Green says, adding that when prices drop domestically, gasoline producers look to foreign markets. “If you’re a refinery you can still sell gas overseas, so there’s a floor to how low prices can go in the US.”

 

Americans are paying high prices in their homes as well. Residential electricity costs in the first half of 2014 averaged 12.3 cents per kilowatt hour – a 3.2 percent increase from the same period last year, according to an Energy Information Administration (EIA) report released Tuesday.

Much of the rise in electricity prices earlier this year was due to effects of a polar vortex that drove up power and heating demand earlier this year.  Meanwhile, pipeline bottlenecks constrain natural gas supply, adding further upward pressure to electricity prices.

“For electricity – in terms of the generation costs – it’s the cost of getting gas to where it’s needed that causes the spikes in prices,” says Tyler Hodge, an electricity analyst at EIA, in a telephone interview Thursday.

But electricity prices “have, in fact, increased at a lower rate than the prices for other consumer goods,” Richard McMahon, vice president for energy supply and finance at Edison Electric Institute, a trade association of electric companies, told the Monitor last month.

And with the summer driving season winding down, motorists will see prices drop as cheaper winter-blend gas hits the market.

“The big crunch in summer travel is done and most of us can look forward to lower gas prices during the next few months,” AAA spokesperson Avery Ash said in a statement Wednesday.

“If we can get through September without any major refinery or overseas problems, we should see more gas stations drop below $3.00 per gallon this fall,” Mr. Ash said.

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