Why have gasoline prices risen again and why is there no relief in sight?
- Gasoline prices continue to climb to record highs.
- Much of the blame so far has been weak oil supply.
- But some analysts say the real problem is low refining capacity.
Another week, another record high for gasoline prices. And there doesn’t seem to be any immediate relief in sight.
The average price for regular unleaded gasoline jumped from a quarter last week to a record high of $4.86 on Monday, AAA said. That’s 59 cents more than a month ago and $1.81 more than a year ago.
“After a blistering week of gas prices jump in almost every city, town, state and region possible, more bad news is on the horizonsaid Patrick De Haan, Head of Petroleum Analysis at GasBuddy. “It now looks not if, but when, we will reach that psychologically critical national average of $5.”
Many states are already above $5 a gallon. The top 10 states with the most expensive gas are: California ($6.34), Nevada ($5.49), Hawaii ($5.47), Oregon ($5.41), Washington ( $5.40), Illinois ($5.40), Alaska ($5.37), Washington, DC ($5.06), and Michigan ($5.05).
Most people blame the rise in oil prices, but the real driver of rising prices may surprise you. It’s the lack of refining capacity.
How does oil affect gas prices?
About half the price of a gallon of gasoline comes from oil, and oil prices have remained near their highest levels since 2008, in part due to tight supply and rising demand.
After being burned in 2020 when economies around the world shut down and demand for oil plummeted, oil producers have been slow to ramp up production. The Organization of the Petroleum Exporting Countries and its allies, collectively known as OPEC+, decided last week to slightly ramp up oil production. This may help cap oil prices, but is unlikely to move gasoline prices.
Indeed, “increasing crude oil supply does not solve the global shortage of refining capacity,” said Natasha Kaneva, head of global commodities at JPMorgan.
What is refining and what does it have to do with the price of my gasoline?
Refining breaks down crude oil into products that we use every day. On average, US refineries produce, from a 42 gallon barrel of crude oil, about 19 to 20 gallons of motor gasoline; 11 to 13 gallons of distillate fuel most of which is sold as diesel fuel; and 3 to 4 gallons of jet fuel, according to the Energy Information Administration.
What consumers view as the price of oil is what refineries pay for oil. Refineries then process this oil into products and sell them. Refiner prices for these fuels are closer to what consumers pay. And those prices are closer to $250 to $280 a barrel, said Daniel Milan, managing partner at Cornerstone Financial Services.
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“That’s what we’re looking at because that’s what the consumer pays, and that’s more than double the cost of a barrel of oil,” he said.
Why is there a shortage of refining capacity?
When COVID-19 hit and global economies shut down, demand for oil and gas plunged many companies have closed their factories. Others were affected by bad weather. Some companies have stopped investing in refineries due to uncertainty about the impact of the transition to green energy on their businesses. When Russia invaded Ukraine, more refineries in Russia were taken out of service.
All this has led to a decrease in refining capacity. Existing refineries are operating at near maximum capacity, but they have been unable to keep up with demand and refining margins have widened, said John Mayes, vice chairman of energy consultancy Turner, Mason & Co.
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The difference between the purchase price of crude oil and the sale price of finished products, or what is called crack propagation, closed Friday up 2.7% at $60.54, near a record high, the EIA said. The crack spread is considered an indicator of the short-term profit margin of oil refineries.
Why don’t we reopen or build more refineries if they are so profitable now?
“It takes many months of planning, work and money to get one started again and companies need to make sure there’s long-term demand,” Mayes said.
And with the push towards electric vehiclesmany companies may not believe the demand will be there, some analysts said.
Two million electric cars sold worldwide in the first quarter, up three-quarters from the same period a year earlier, according to the May report from the International Energy Agency.
What does this mean for consumers and gasoline prices?
To better gauge where gas prices are going, consumers should watch refinery prices, not oil prices and not OPEC+ production increases.
“The size of the production increases is irrelevant if there isn’t enough capacity to distill that crude oil into clean products,” Kaneva said.
It predicts that the national gas average will rise to $6.20 a gallon this summer.
The only respite for drivers is that at some point they will back down from record high gasoline prices, demand will fall, and prices will follow.
“But we’re not there yet,” said AAA spokesman Andrew Gross.
Medora Lee is a money, markets and personal finance reporter at USA Today TODAY. You can reach her at [email protected] and sign up for our free Daily Money newsletter for personal finance tips and business news Monday through Friday mornings.