Anyone who drives a car in our area probably knows that gasoline prices have increased dramatically over the past month. Gas prices tend to rise early in the year, as refiners shift to the more expensive summer blend. However, this recent price move of nearly a dollar per gallon over the past month is far greater than historical averages.
There are four main costs that go into the price at the pump. These are: the price of crude oil, refining, taxes, and retail operations. Changes in the price of crude oil and refining are the two most significant variables that move the price of gas. Taxes have been fairly constant, though sales taxes increase when prices go up, and margins of gas station operators are little changed.
When gasoline prices fell significantly during the second half of last year the bulk of the drop was attributable to the fall in the price of crude oil. So far this year, there has not been a major change in the price of crude oil, but there has been a major supply reduction in refining operations.
There have been two major events that are impacting refinery operations in California. One is the fire at the Exxon refinery in Torrance, and the other is a strike at a refinery in Northern California. The strike is national in nature, though it is only impacting a select number of refineries across the country. These two events have reduced refining capacity in California by 17 percent according to one estimate.
In California because of our special fuel requirements, when there is a shortfall, it is difficult to import gasoline from other areas. The rest of the country has seen the price of gasoline rise, due to the refinery strike and also greater demand for heating oil. However, the magnitude of the price increase nationally has been much less.
Typically the price of gasoline in California is about 30 to 40 cents higher a gallon than the national average. Currently that differential is nearly a $1 per gallon, as the national average for gasoline, as of Monday was in the $2.40 range.
There are some people who think that the recent increase in the price of gasoline is due to some conspiracy by the oil companies to rip off consumers. However, if that point was true, why aren’t oil companies keeping the price of gasoline high all the time? In actuality, oil companies are just as greedy when prices are falling, as when they are rising, but it is really supply and demand shifts that cause price changes.
Another point to consider is that if oil companies were earning excess profits their stock prices would be doing better. During the past month, when the price of gasoline skyrocketed, there was little change in the price of the stocks for the two largest oil companies, Exxon and Chevron.
Clearly the refiners that are still operating are doing very well at the moment, but this will only be a short-term event. The situation is similar for farmers when there is a drought. Those farmers that can still grow their crop will benefit from the higher prices, while those impacted by the drought will suffer.
This price spike that we are currently seeing is certainly creating some unease among consumers. There are certainly some people who are probably thinking that fall in prices we saw late last year was an aberration, and prices are just going back to where they were previously.
While prices may stay near these levels for a period of time, they should come back down. Refinery operations can definitely impact prices in the short run, but it is the price of crude oil that will impact prices longer term.
Currently the price of crude oil is about $50 per barrel, after being near a $100 per barrel for much of the first half of last year. A $10 per barrel change typically impacts the price of gasoline 25 cents per gallon. This would imply that the price of gasoline should be about $1.25 per gallon less than where it was last year.
It is difficult to say where the price of crude oil will go this year. However, I think it is more likely that the price of gasoline here will average closer to $3 per gallon rather than $4.