Gas prices expected to soar. What gives?
Gas prices will rise dramatically in the near term, analysts predict. Many attribute it to a rise in oil prices, but the gas prices spike has more to do with gasoline fundamentals, writes Styles.
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What does that mean for gasoline prices? If you live on or near one of the three coasts, probably not much by itself. Consider gas prices in my home state of Virginia. Like most of the East Coast south of Delaware, the majority of our fuel is supplied by pipeline from refineries in the Gulf Coast. According to the Energy Information Administration’s (EIA) latest survey of retail prices, unleaded regular gasoline in the region sold for an average of $3.37/gal. last week. (My local prices are about 20¢ higher than that.)Skip to next paragraph
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If we subtract the Virginia and federal gas taxes totaling $0.375/gal., and another $0.20/gal for a typical retailer’s margin, that gets us a wholesale price of $2.82/gal. Now subtract the Colonial pipeline tariff from Houston to Fairfax, VA of $0.033/gal., leaving $2.78/gal. or $117 per barrel at the Houston-area refinery gate. Even after allowing for refinery profit margin, that suggests that product prices in the central- and lower-Atlantic states were already reflecting global oil prices, rather than deeply discounted prices for domestic crude that couldn’t find an outlet past Cushing. The West Coast was even less affected by cheap WTI.
On the surface, the return of a more normal WTI/Brent relationship poses more risk of higher prices for consumers in states where refiners have enjoyed a couple of years of less expensive crude, relative to the rest of the country. Yet EIA’s data shows that average gasoline prices from 2011-12 weren’t much cheaper in the Midwest, compared to the East Coast, than they were in 2007-10, before the crude spread widened. Cities like Tusla, OK might have enjoyed some nifty local discounts for a while, but the main beneficiaries of the crude oil bottleneck in the mid-continent seem to have been companies like HollyFrontier that were in the right place at the right time with refineries that profited much more than under more typical circumstances.
Conclusion: If You’re Worried About Gas Prices, Focus on Gasoline’s Fundamentals
Overall, in the absence of a larger shift in global oil prices, the prospect of higher US gasoline prices in the weeks ahead has more do with seasonal factors such as increased fuel demand from summer driving, and a US economy that has proved more resilient, recently, than other parts of the globe. The unwinding of an unusual gap between domestic and imported crude oil prices likely has bigger implications for domestic producers and refiners than for consumers.
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