Last year around this time the average retail price of gasoline was about $3 per gallon. It then began a steady decline and reached about $2.40 in December and slightly lower in January. Since then, it has been steadily rising, reaching $2.74 this month. Some have speculated that $3 per gallon will be reached in the near future, perhaps around Memorial Day. We should be grateful that the price is not higher.
Since December the average price of crude oil has risen almost $20 per barrel, from $45 to $64. That alone would translate into a 45 cent per gallon increase, which covers the price increases since the start of the year. Crude oil prices are the major driver for prices at the pump but not the only ones. In addition to the effects of supply and demand imbalances, the price of ethanol comes into play as does the regulatory requirement to produce summer gasoline to counter smog formation and spring refinery maintenance.
For anyone who doesn’t remember the formula for summer or reformulated gasoline (RFG) was written into the Clean Air Act Amendments of 1990. The legislative specifications covering oxygenates, benzene levels, olefins, sulfur, and evaporation were included to mask the ethanol mandate. Since producing RFG is more expensive, it normally results in an increase of about 10 cents a gallon during the summer months. All other things being equal, the price of gasoline prices should be higher.
Although Russia and Saudi Arabia appear to be adhering to the OPEC agreed production cut back, adherence by other members is always problematical. Production has been exceeding the stated 30 million barrel per day quota because as crude prices rise, members have an incentive to cheat. And even though production by some members has declined recently, those reductions won’t last long except for Venezuela. Most OPEC members like to get while the getting is good.
US shale production is up 25% from this time last year and will continue to increase as prices do. The loss of Venezuela heavy crude imposes additional costs on refiners. The next best source is Canada but the lack of pipeline capacity and efficient distribution alternatives limits supplies to US refiners. Constraints of Canadian distribution will be removed in the coming years as a result of increased pipeline investments.
While OPEC and Russia would like to see crude oil prices around $80 a barrel, the downward pressure from a slowing global economy, cheating, increased domestic production and increased crude from Canada will likely keep that price target from being achieved absent some unknown and unpredictable event.