6 Keys to Understanding Gas Prices

May 15th, 2018 by

There are 6 keys to understanding gas prices. Unleaded gas is at its highest level in six months and it seems that every time you go to the pump it is up another 10 cents. Don’t worry, fuel prices are not going to rise indefinitely and not back to historic levels.

Many blame the price escalation on global politics and economics, but there are both market and regulatory reasons for the increases.

  1. It is summer. Gas prices generally rise in summer for two reasons, first because there is increased demand and oil companies take advantage of that. Secondly, the Environmental Protection Agency (EPA) regulations require both summer and winter blends of gasoline and the summer blend is more expensive to produce. In addition, states have different laws which require refineries to produce a variety of summer blends to meet regulatory requirements. Conversely, these laws protect the ozone and make the air cleaner.
  2. As crude reaches and possibly passes $70 per barrel, oil producing nations such as Iran, Iraq, Turkey, Russia, and Venezuela move from breakeven to profit.
  3. American oil producers also see increased profit potential. When the price of crude falls American companies stop drilling, producing and refining.  Intuitively, as there is an opportunity, they resume oil activities as well; further increasing the supply of gasoline which will eventually overcome demand and cause price easing.
  4. Refinery Maintenance Outages—Gasoline refineries plan outages to perform maintenance which results in reduced capacity and output. Refineries that try to cover the shortfall, likely have increased operating costs that also adds to increased prices at the pump.
  5. Higher Crude Oil Prices—have jumped to their highest level since 2015. Higher crude oil=higher gasoline prices.
  6. The Organization of the Petroleum Exporting Countries (OPEC) represents 14 countries, 44% of global oil production, and 73% of the world’s oil reserves have a major impact on global oil prices. However, member states often place national self-interests and profit before agreements and there is no enforcement which adds to market volatility.

In summary, both crude and gas prices may continue to rise this summer. Additionally, a few things are likely to happen.  First, more refineries increase production and new companies will emerge. Both will create more competition and pressure on prices.  Seasonal demand will decrease in the fall.  We have enjoyed a long period of low gasoline prices. We may not see $2 a gallon again, but prices will stabilize. This isn’t a crisis.