Gasoline Prices: Onward and Upward?

Gasoline prices have been steadily increasing in the past year, going from a national average of $1.87 early in 2016 to $2.51 in July.  The end of the driving season should provide some relief but it won’t be enough to offset upward pressures.

There are 4 factors that drive gasoline prices:  crude oil prices, demand, refinery enhancements, and more recently exports, which have more than doubled since 2010.  Crude oil prices are roughly $6 a barrel higher this year than last, although OPEC was expecting a larger increase from its production cut.  A $6 per barrel increase translates into an increase of 14 cents per gallon.  According to EIA, domestic demand and product exports have been running above the five-year averages.  As long as the economy continues to improve, gasoline demand will remain robust.  Although, refinery production of gasoline has been strong, it has not been sufficient to meet demand, so there have been draws from product inventories.  Reductions in inventories also put upward pressure on gasoline prices because of expectations about the future.

In addition to the increase in the average price of gasoline, the price difference between regular and premium has also been increasing.  According to the Energy Information Administration, as of July 2017 the premium -vs.-regular differential reached $0.53/gallon — more than double the differential in 2012.  Although historically 90% of gasoline sales have been for regular, midrange and premium demand has grown in importance as sales of higher performance and turbo charged vehicles have increased.  EIA also attributes higher fuel economy standards as a driver in increased demand for midrange and premium gasoline.  Demand alone cannot explain why premium prices have increased more rapidly than regular.  The rest of the answer is the cost of production.

The octane level of gasoline before ethanol blending or chemical reforming is less than the 87 octane of regular gasoline.  For the past decade, ethanol, which has an octane level of 115, has been blended with straight run gasoline to achieve the needed octane levels for gasoline sold at the pump.  Now, with growing gasoline demand, ethanol blended with gasoline has reached the legal 10% limit and other sources of octane enhancement are needed.  Refiners have made refinery modifications to increase alkylate production which is the octane booster of choice because it is low in sulfur but high in octane.  Producing alkylate is expensive, resulting in a price per gallon that is 30 cents more than gasoline at the refinery gate.

So, even though gasoline prices have been rising, today’s price has to be considered a bargain when compared to the $4.00 per gallon that motorists were paying in 2011.  No one knows what the price of gasoline will be in the months ahead or next year but the likelihood is that it will continue the steady pace upward if the economy remains strong.  What is important is looking to the future is to keep in place policies that do not restrict domestic production or the efficient operation of refineries.  That will allow market forces instead of political forces to determine the price at the pump.

Author: billo38@icloud.com

Founder and president of Solutions Consulting which focuses on public policy issues, strategic planning, and strategic communications.

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