If you’ve found yourself paying more than usual at the pump lately, you’re not alone. The cost of gasoline in the United States continues to reach all-time highs, and though prices are still lower than they were when gas hit $4 per gallon in 2008, consumers are beginning to wonder if the price will continue to rise or fall, or if it will settle somewhere in between. So what makes gas prices so high? Let’s take a look at some of the factors that can affect prices so drastically.
Refineries, Crack Spreads, and Green Credits… Oh My!
Like any other business, refineries have costs to cover in order to operate. The cost is usually the price of crude oil which isn’t too incredibly high right now. They profit by selling refined crude oil as gasoline at a higher pricing point than they bought it for. The difference between the cost of crude oil and the cost of gasoline is the “crack spread.” The crack spread is used to estimate the profitability of manufacturing a certain petrochemical. Right now, the crack spread sits at about $25. While that may initially sound significant, there are even more costs to account for. When companies produce gasoline they have the option to blend ethanol biofuel in to meet mandates or ignore the mandate. If they choose to not blend biofuel and ignore the mandate refiners must purchase “renewable identification numbers” which are green credits that are becoming increasingly more expensive. All of this continues to cut into refiners’ bottoms lines, causing them to sell at a slightly higher price just to fund operations.
Supply and Demand
Supply can be affected by multiple factors including natural disasters that impact oil refineries (Hurricane Ida), fuel tariffs imposed by foreign governments, infrastructure issues that limit capacity, and more. Demand can increase during peak driving seasons like summer vacation, or even long weekends. This past labor day weekend was one of the busiest in recent times, especially when compared to last year when very few people felt comfortable traveling during the early stages of COVID. When compared to the last 2 years, road trips requiring overnight hotel stays are up 1474% according to the Auto Club of Southern California. Because of this, gasoline demand has outpaced supply leaving the US with the lowest level of gasoline stocks available in at least the past 5 years. Either way, gasoline is a relatively inelastic product. This means that if the price goes up demand will remain essentially the same. Americans are consuming vast amounts of expensive gasoline and taking more road trips than ever leaving a slight scarcity of gasoline. This ultimately means gas prices will be pushed even higher.
Shortage of Truck Drivers
This is perhaps one of the simplest reasons. Trucks haul a lot of freight around, but there aren’t enough drivers to do all of that hauling. This means that some gas stations aren’t receiving gas deliveries for longer than they are accustomed to. This allows them to charge a higher price for gasoline thanks to the scarcity. Sometimes it gets taken a step further, and the gas station is out, causing a spot shortage. Usually, this pushes more drivers to another gas station. Since the demand is high, the price can be raised as well. The shortage of truck drivers exists because the veterans are retiring as fewer people enter the field to replace them.
California’s Special Requirements
Not all gas is created equally. That’s why you could buy a gallon for $2.798 in Mississippi or $4.396 in California on the same day. Oil refineries and distributors in California must adhere to very specific and extremely strict fuel requirements. This is due to a number of factors, from stringent environmental standards that limit or ban many chemicals from being used in or emitted by cars, to regulation of air quality on a state level. Because of these standards, oil refineries must add different blends of chemical additives into their fuels, which significantly increases production costs. All of these factors make gas prices in “environmentally-conscious” states much more expensive than others.
We hope that you now understand some of the reasons that influence the gas prices. Most of these reasons can even work in the other direction causing gas prices to fall, but thanks to decisions from the current presidential administration and COVID, that is not likely to happen soon. Be sure to follow us on LinkedIn and subscribe for more energy-related content generated weekly.
information sourced from https://www.eia.gov and https://www.gasprices.aaa.com