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Gas Prices Too High. Blame India?

Who's to blame for gas prices now hovering near a national average of $3.80 a gallon? Take your pick: Iran, market speculators, oil companies, India.

Bombay Traffic
Neil Beer | Photodisc | Getty Images
Bombay Traffic

India? Really?

Yes. Already the fourth largest energy consumer in the world, India's demand for oil looks set to rise inexorably as more of its people buy cars and take to the road. Ditto for China and other emerging markets. Their rising demand is pushing up prices for everyone.

This consumer competition is usually subtle. For decades, Americans were king of the road. When they put the pedal to the metal, the world rushed to produce the oil and gasoline to fuel the ride. (The exceptions, from OPEC nations, were temporary.)

Now, however, world producers of oil and gas are not going to jump quite so fast. There are other, more dynamic markets to serve than the United States.

Have you driven on the East Coast, lately? Prices surgedthere late last month for all the normal reasons plus one: the increasingly dire state of refining in the Northeast.

The East Coast facilities are old and set up to process the wrong kind of fuel (crude from Europe and Africa, which is selling at a premium because of the West's tensions with Iran). They're also located in the wrong place. Although the Northeast market is huge, it is stagnant. Regional demand for gasoline is actually down 7 percent since its peak in 2005.

As a result, refiners are losing money. Last year, two refineries in Pennsylvania closed. Another one, a US Virgin Islands facility that supplied the East Coast, shut down last month. Those closures have stretched the region's capacity to produce enough gasoline for the region and pushed up prices.

If Sunoco closes its huge Philadelphia refinery this July, which it says it will do if it can't find a buyer, it would eliminate a third of the region's refining capacity and probably cause gasoline prices to rise even more over the next several months, the US Energy Information Administration says.

Why not build new refineries? Oil companies don't want to build new facilities in declining markets.

"You go where the growth is," says Andy Lipow, an independent oil analyst in Houston. That means Asia. India boasts the largest oil-refining complex in the world, itself equal to all the refining capacity in the Northeast US.

Prices in the Northeast are high enough that the oil industry will figure out how to meet demand, especially once the fate of the Sunoco refinery is settled. That might mean more gasoline brought in from the Gulf. Or it could be more gasoline imported from overseas.

India, notably, already delivers 40,000 barrels of gasoline a day to the East Coast. Rising prices in New York might coax a little more gasoline out of the subcontinent. But India also has the world's second-fastest growing car market after China. By one estimate, it will have more cars on the road midcentury than any other nation in the world.

So where is its gasoline going to go in the long term? Bangalore. Not Boston.

Drivers in the fast-growing nations of the developing world have grabbed the steering wheel. And they're not going to let go.

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