America’s Shale Boom Is Cushioning US Gas Prices From Iraq Chaos
Brent oil futures briefly began approaching $115 this morning, the highest level in nine months, as fears that Iraq is disintegrating spooked markets.
Crude is now up about 4% on the week. When prices stay at this level for this long, U.S. gas prices start creeping up.
But what about all the oil the U.S. has been producing the last few years? Shouldn’t we be insulated from whatever oil is doing?
Unfortunately, the answer is no. Gasoline prices are set on the global market, and refiners everywhere ship product to wherever they can get the best quote. So for better or worse, raw gasoline prices mostly move in lockstep around the world. The primary contract for gasoline is called RBOB.
But that doesn’t mean there’s been no impact from the shale boom. The net amount of crude the U.S. has added to global markets has resulted in one of the longest periods of oil price stability in years, and has helped push the broader trend down. This, along with subdued demand, is why U.S. gas prices have enjoyed low volatility in the last few years, averaging just $3.54 a gallon since 2011, according to FRED.
Here’s another view, from Reuters’ John Kemp, showing the Herfindahl index, a measure of the concentration of a given unit, and thus its sensitivity to price shocks. The curve has been going up in recent years thanks to U.S. shale boom and outages in the Middle East in places like Libya. When you remove the U.S. from the equation, the concentration — or sensitivity — gets even more severe: