Supply and Prices: Oil

One of the most visible barometers of U.S. energy prices is the price of motor gasoline. Usage in the U.S. amounts to 8.4 million barrels (42 U.S. gallons per barrel) per day (1999). In June 2000, gasoline prices climbed to well over $2.00 per gallon in the Midwest, reaching the highest prices ever (in nominal dollars) in the region. As a result, Illinois dropped its sales tax on gasoline for the remainder of 2000 to lessen the impact on consumers and began investigating industry pricing. Regardless of the outcome of the investigations, it is important to recognize that this price event took place against a background of international and national petroleum supply trends favoring higher prices.

figure 2: OECD Stockpiles.

Figure 1
Oil stockpiles of the twenty-nine countries within the Organization for Economic Cooperation and Development (most of western Europe, the U.S., Canada, Mexico, Australia, and Japan, among others). Note the decline in stocks at the end of 1999 below the three preceding years and below the 1990-1995 average. Source: Energy Information Administration.

World Oil Overview

In 1999, world oil production relative to consumption showed an average daily deficit of about 0.8 to 1.3 million barrels per day. Average world production was about 71.9 million barrels per day, while average world consumption was about 73.2 million barrels per day. Oil stockpiles provided the remaining needed oil. Saudi Arabia is the world's leading producer, accounting for 8.6 million barrels per day, or about 11.9 percent of production. As the world's leading consumer, the U.S. accounted for 18.5 million barrels per day, or about 25.5 percent, of consumption. As 1999 closed, oil stockpiles in major consuming nations were below historical trends (Figure 2). At the end of the first quarter of 2000, world demand was 75.62 million barrels a day, but world supply was only 75.05 million barrels per day, indicating a continuing world deficit.

U.S. Oil Overview

Most people are aware that U.S. oil production is down and oil imports are up. The magnitude of these trends may not be widely known. Lower 48 reserves peaked in 1959; production peaked in 1970 (Figure 3) and has declined irregularly since then. In 1970, the U.S. produced 9.2 million barrels of oil per day and imported about 1.3 million barrels per day, accounting for 12 percent of its supply. In 1999, the U.S. produced 5.9 million barrels per day but imported about 8.6 million barrels per day, or about 56 percent of supply. Oil imports have been steadily growing, up by 46 percent since 1990. These imports come from the Organization of Petroleum Exporting Countries (OPEC), which supplied about 4.2 million barrels a day to the U.S. in 1999, and from non-OPEC sources, which supplied the U.S. with about 4.5 million barrels per day. Saudi Arabia and Venezuela are the leading OPEC suppliers, and Mexico and Canada are the leading non-OPEC suppliers.

Recent OPEC Actions

The 11 members of OPEC provide 40 percent of world oil production and control 78 percent of the world's proven oil reserves. In response to slumping oil prices, in part brought on by the economic downturn in Asia in 1997-1998, OPEC and several non-OPEC countries cut production in March 1999 by 2.1 million barrels per day. As a result, prices rebounded from $12.30 (March 1999) to $29.57 per barrel (June 2000) with prices continuing above $30.00 through most of summer and fall 2000. The OPEC production cuts, economic rebound in Asia, and robust U.S. demand into mid-2000 helped set the stage for some well-publicized motor gasoline price spikes, as occurred in Illinois.

figure 3: History of Crude Oil Reserves and Production.

Figure 2
History of the U.S. lower forty-eight states crude oil reserves (left scale) and annual production (right scale). Note the production response in 1984-1985 to high oil prices, over $31.00 per barrel, in 1981-1982. Source: Energy Information Administration.


Impacts on Illinois Gasoline Supplies

The motor gasoline price increases that affected the Midwest, including Illinois,in June and July 2000 were the result of both the world oil supply situation and the result of factors affecting the Midwest at that particular time. Six factors can be specifically cited as supporting higher Illinois gasoline prices this past summer: (1) world petroleum consumption was again growing, (2) U.S. petroleum import dependence was at record-high levels, (3) OPEC has worked effectively as a group since early 1999 to control oil supply, (4) petroleum and petroleum product stockpiles were at low levels, (5) U.S. refinery utilization was at record-high rates, and (6) new reformulated gasoline requirements were introduced in the Chicago area in May 2000, complicating the gasoline supply and distribution network. In addition, certain blending components were apparently in short supply as a result of pipeline supply interruptions affecting the region, which may have made production of the new Phase II reformulated gasoline by refiners even more difficult. Multiple market forces were operating, many of which were international and national rather than strictly regional in scope.