Why Oil Prices Aren't Coming Down Despite Big U.S. Oil Boom

The dual promise of the U.S. shale oil boom was that it would reduce our dependence on foreign oil and lower oil prices that would benefit U.S. consumers via cheaper gasoline.

But while U.S. oil production continues to rise, and gasoline consumption continues to fall, gas prices have remained stubbornly high: The national average was about $3.65 last week.

And that trend is expected to continue, with the United States surging past Saudi Arabia as the world's largest producer of crude oil as soon as 2020. Meanwhile, U.S. gasoline demand is at its lowest in more than a decade - down to 8.7 million barrels a day.

Facts like that have led some pundits to predict falling oil prices. Last year, some politicians were promising that stepped-up U.S. oil production could lower gasoline prices to $2.50 a gallon.

Frustrated U.S. drivers struggling to cope with high gas prices were eager to believe such promises, no matter how unlikely.

Unfortunately, all that new U.S. oil, while helpful in some ways, will not have much effect on gas prices - either now or in the foreseeable future.

"The problem is that prices are not just reflective of new supplies, either too much or too little," explained Money Morning Global Energy Strategist Dr. Kent Moors. "By focusing only on how much is there, these analysts provide a fundamentally distorted view of the oil market."

Why Oil Prices Are Immune to Rising U.S. Oil Production

The U.S. oil market is subject to a complex web of forces, some domestic and some global - and most of them are pushing oil prices higher.

Increasing U.S. oil production, as it turns out, has helped reduce U.S. oil imports, but it's global demand that determines how much the black gold costs.

While fuel demand has dropped in the U.S., it's risen 28% in China over the past five years.

Exports of U.S.-refined fuel have accelerated over the past few years to countries like China, Brazil, Venezuela and India.

Moors pointed out that complex swapping agreements between oil companies also encourage the export of U.S. refined oil.

Companies on opposite sides of the globe, each with a distant customer, will agree to send equivalent amount of product to the other company's customer - that happens to be closer to their export terminal. This helps each company by expanding its markets and saving on transport costs, but sends more U.S. fuel out of the country.

The transportation costs of refined fuel provide another incentive to export. Because of an obscure 1920 law that requires cargo shipped between U.S. ports to use U.S.-flagged ships, it can cost more to ship fuel from a Gulf Coast port to an East Coast port than it does to ship it overseas.

"The tools are in place for the U.S. to become an even bigger exporter of gasoline and diesel," Stephen Schork, president of the Pennsylvania energy consulting firm Schork Group, told Bloomberg News.

While politicians love to talk about rising U.S. oil production, they rarely mention that much of it is being shipped overseas. All that new U.S. oil is getting absorbed by a hungry global market that's consuming it an even faster rate and willing to pay higher prices to get it, keeping oil prices elevated.

High Gas Prices Are Here to Stay - But You Can Profit

Domestic issues also have played a big role in keeping gas prices high in the U.S.

First, there's the ethanol issue, which because of rising annual quotas has a larger impact on gas prices very year.

Despite falling U.S. gasoline consumption, the government-mandated quota rises every year. Most U.S. autos can't use anything higher than a 10% ethanol blend, so refiners must meet the higher quotas by buying credits instead.

The widening discrepancy between the rising quotas and the declining need has vastly increased the need for the credits, which have skyrocketed in price from 7 cents a gallon in January to 66 cents a gallon. That alone adds 10 cents a gallon to gas prices.

Worse still, droughts have caused poor U.S. corn harvests in recent years, making corn - and the ethanol made from it - even more costly.

Another issue is transportation costs. Much of the production form the shale oil boom is occurring in remote areas of North Dakota, Wyoming and Colorado, where the infrastructure to transport large amounts of oil doesn't yet exist.

Existing oil pipelines are inadequate. That has led to an increase in the use of railroads to transport U.S. oil, which is much more expensive - as much as $17 a barrel more expensive.

Add it all up, and it's easy to see why the shale oil boom can't relieve any of our pain at the pump.

"The prospect is there for new sources, but the costs being passed down the line are extraordinarily high," Moors said.

For investors, however, the transportation bottleneck presents a silver lining. Americans won't be getting any relief at the pump anytime soon no matter how much oil turns up in the U.S., but companies that move the oil most certainly stand to profit.

This means if you position yourself to profit from rising oil prices, you don't have to get angry every time you fill up your gas tank. And Dr. Kent Moors just released a report on the hottest new profit opportunity in oil and energy. Just click here to learn how to pocket these gains.

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About the Author

David Zeiler, Associate Editor for Money Morning at Money Map Press, has been a journalist for more than 35 years, including 18 spent at The Baltimore Sun. He has worked as a writer, editor, and page designer at different times in his career. He's interviewed a number of well-known personalities - ranging from punk rock icon Joey Ramone to Apple Inc. co-founder Steve Wozniak.

Over the course of his journalistic career, Dave has covered many diverse subjects. Since arriving at Money Morning in 2011, he has focused primarily on technology. He's an expert on both Apple and cryptocurrencies. He started writing about Apple for The Sun in the mid-1990s, and had an Apple blog on The Sun's web site from 2007-2009. Dave's been writing about Bitcoin since 2011 - long before most people had even heard of it. He even mined it for a short time.

Dave has a BA in English and Mass Communications from Loyola University Maryland.

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