Shale Magazine has received numerous inquiries from readers recently regarding the rising price of gasoline, so I thought I’d try to explain what is going on with that today.
Basically, gasoline prices rise every year during the spring due to a handful of seasonal factors. In addition to those annual factors, this year has also seen a rapid rise in the price for crude oil, from which gasoline is created at the nation’s refineries. Here are some details:
- Higher demand for gasoline – Americans drive more in the spring and summer, as we come out of winter each year. Higher demand for any product tends to lead to higher prices for that product.
- Summer blend gasoline requirements –The Environmental Protection Agency (EPA) regulations designed to control and reduce atmospheric ozone require refiners to produce both “winter blends” and “summer blends” of gasoline. The switch-over from winter blends to summer blends takes place each spring, and the simple fact of the matter is that it is more expensive to produce summer blends than it is to produce winter blends. The ingredients in summer blends cost more, and, due to state and local regulations in several parts of the country, refiners must produce more than 20 different summer blends, which must then be transported to specific regions in specific volumes at specific times, adding higher costs of distribution to the higher costs of production.
- Planned Refinery maintenance outages – The refineries that produce gasoline have planned, routine maintenance outages as they emerge from winters (trust me, you want these refineries to be properly maintained), which results in reduced overall refining capacity, causing active refineries to run at higher levels, thus increasing their costs. Higher refining costs in turn create a higher cost for gasoline. Again, simple economic reality.
- Higher crude oil prices – The price for crude oil has risen 20% since January 1. According to the Energy Information Administration (EIA), the retail price for gasoline since January has risen by less than 15%. So, all other factors being equal, the gasoline price increase hasn’t even accounted for the rapid rise in the cost for crude.
As I’ve explained in previous Shale ‘Splainers, the price for crude is not likely to move a lot higher in the near term, so the price for gasoline is probably close to its peak for the time being. I’ll explain in detail why the price for crude oil is rising so significantly in the next Shale ‘Splainer.
That concludes your Shale ‘Splainer for May 23, 2018.