Gasoline prices in the US are in the midst of a surprise late-season rally. Even small increases can have an outsize impact on consumer confidence and evoke painful memories of last year’s record surge in pump prices that helped drive inflation to a 40-year high. With the election season starting to heat up, fuel costs are once again at the center of the political debate. Republicans have blamed President Joe Biden’s climate policies for the price surge. Democrats accuse oil company executives of exploiting drivers to fatten their profit margins. The real reasons aren’t so clear-cut.
1. What’s happening to US gasoline prices?
Pump prices are near their highest level ever for this time of year. Prices peaked in mid-2022 following Russia’s invasion of Ukraine. They remained well below those highs for much of this summer, before climbing when they typically fall. On Aug. 30, average pump prices reached $3.83 a gallon. That’s a penny below last year’s seasonal record and 90 cents above the five-year average, according to data from the American Automobile Association.
2. What’s behind the late-season surge?
Refinery hiccups, exacerbated by record heat in the fuel making hub of Texas and Louisiana, limited output from gasoline producers. Refinery cooling towers don’t work as well when it gets too hot for too long, and other equipment becomes vulnerable to breakdowns. At the same time, gasoline demand climbed above last summer, when the record prices led many drivers to pull back at the pump. July was also a huge month for US gasoline exports: Kpler data show as many as 370,000 barrels a day went to Mexico, for example, where a string of refinery and crude production issues increased the country’s need for imports from the US. These factors converged in the second half of July, driving the increase in pump prices.
3. Are prices going to stay high?
A lot depends on the weather. With fuel inventories near the bottom of their five-year range, any supply disruption could cause prices to spike. Refining and transportation infrastructure on the US Gulf Coast has been largely spared from hurricane damage for the past two years, but that can change as the storm season enters its most active phase. Barring storm disruption, prices could begin to fall. Markets begin transitioning to winter-grade fuels in September (the EPA limits those in the summertime for pollution control). These grades can be made from a wider pool of components that are often less expensive. The cost difference was already evident in the futures forward curve: Nymex gasoline deliverable in October was trading more than 20 cents a gallon below the September contract.
4. What goes into the cost of a gallon of gasoline?
The number one factor that determines gasoline costs is the price of oil, a globally traded commodity that rides the wave of supply and demand, geopolitics and, increasingly, robot investors who take speculative positions to profit from volatility — all factors beyond individual control. In 2022, crude oil costs accounted for 57% of gasoline prices, according to the Energy Information Administration. Refining — processing the crude into fuel — took up another 18%, with the rest split between taxes and fuel distribution and marketing. Pump prices have always been a hot topic of political debate, and high prices are one of the most visible signs of inflation, displayed in large print at filling stations. To the extent that politicians are responsible for the economy, they often take the blame when consumers are hurting.
5. Can Biden do anything about high fuel prices?
Fairly or not, fingers are most often pointed at the president when prices climb, though the White House generally has little control over the cost of crude or gasoline. Biden, in turn, has accused oil companies of “profiteering” during past price spikes, by raking in high profits and devoting the cash to dividends and share buybacks instead of aggressive new drilling programs. However, it can take years for spending on new drilling to yield more crude, and investors are wary of opening the spigot too far. Allies of the oil industry say Biden administration policies — including measures encouraging the use of biofuels and the adoption of electric vehicles — also deter capital investment for crude and fuel production.
6. What else is causing high fuel prices?
One important bottleneck has been the lack of refining capacity. More than 1 million barrels a day of US fuelmaking capacity was shut during the pandemic, and new facilities that have come online in the past year in Asia and the Middle East have had troubled beginnings that prevented them from reaching full operations. In other words, there is a gap between upstream investment and fuel availability.
7. What will happen to gasoline prices longer term?
While demand is unlikely to return to pre-pandemic levels as vehicles become more fuel efficient and more drivers switch to EVs, it’s still historically high. Yet refining capacity in the US is shrinking as more investment is channeled toward cleaner energy sources. This is a point of tension in the transition to less carbon-intensive forms of transportation: progress is likely to come at a higher cost.
–With assistance from Jennifer A. Dlouhy.
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