Why Gasoline Prices are Surging Again

Why Gasoline Prices are Surging Again

by | published April 22nd, 2014

The price of gasoline in the U.S. is on the rise again.

Futures prices for RBOB (“Reformulated Blendstock for Oxygenate Blending”), the NYMEX futures contract for gasoline, are up over 11% for the year and a full 6.6% of that increase has come in the past month.

In fact, gas is up 2.4% over the past week alone. Today, the average retail price is 4 cents higher per gallon than a year ago.

And you can bet that as we move into the “official” start of the summer driving season, the worst is yet to come. Prices will be headed even higher.

So with all the hoopla surrounding our newfound oil wealth and our legitimate move to become energy self-sufficient in as little as a decade, why are gas prices still climbing?

Let me explain…

More Oil Doesn’t Necessarily Mean Lower Prices

But first I need to clear the record about what this new largess in unconventional oil actually means. Then I’ll identify the two primary causes of higher gas prices, along with a third catalyst that is waiting in the wings.

Now it is quite true that the main element in the cost of refined products remains the price of crude oil. However, the reason America became so dependent upon foreign imports in the first place is that they were cheaper.

It was simply less expensive to produce abroad and transport than it was to extract from the declining conventional oil base inside the U.S.

By the time we reached the point where 68% of our daily oil needs were being met by imports, U.S. domestic production was largely coming from mature fields in what was rapidly becoming one of the most expensive places in the world to extract oil.

At the time, over 60% of all daily U.S. production was coming from stripper wells. On average, these wells provide less than 10 barrels of oil a day while bringing up 15 to 20 barrels of water for each barrel of the crude.

Shale and tight oil is now completely changing that dynamic, although there are indications the cost of production is beginning to move up. Nonetheless, the financial attraction of importing has appreciably declined (along with a welcome rise in the security of supply).

By 2025, the U.S. is now projected to have cut its daily import needs by more than half from the highpoint only a few years ago. Only about 30% of that requirement will need to be imported. Additionally, just about all of the volume sourced will be coming in from Canada.

So that should allow us to parlay the new found subsurface wealth into lower overall refiner product prices, right?

Well, in a single word, no.

First, while one side of the trading scale (imports) may be declining, the other (exports) is rising… and fast. Today, American refineries are now leading the world in the export of oil products, especially when it comes to gasoline and diesel.

Now, it’s true. We do have fewer refineries than we had twenty years ago, but the aggregate production capacity has actually improved thanks to technological advances and increases in refining capacity at the remaining plants.

These refineries are also processing a larger cut of crude passing through them, and in many cases have been refurbished to process heavier grades of crude. This latter point becomes especially important with the oil sands product moving down from Canada.

Refinery capacity is stretched but is still within manageable limits.

However, the profitable move these days is for refineries to export product to parts of the world prepared to pay a hefty premium over U.S. consumers. This is not creating in any shortage of gasoline in the U.S., but it does put an upward pressure on prices.

And yes, some pundits are already calling for an “American first” strategy in this case, with the cost as the deciding factor. They are calling for a cut in exports of gasoline – not because we have a dearth of volume available domestically – but because it costs a few cents more a gallon at the pump. But attacks like this on a free market system will always result in remedies that are far worse than the disease.

Second, we are finally starting to see a rise in U.S. demand, matching increases already experienced elsewhere in the world. This global acceleration has been the main reason why exports have become more profitable for American refineries.

The demand improvement itself is a result of two primary factors.

One is an improving economy. The other is that the U.S. is now working through the last vestiges of downward pressures brought on by the recession. Finally, pent up industrial and commercial demand is kicking in, matching the steady improvement in retail consumer usage levels.

But this demand is still not close to the levels experienced before the credit crunch hit. That means there will be additional increases headed our way and further rounds of upward pressures on gasoline prices.

Biting the Bullet on Higher Gas Prices

So we are likely to be flirting with $4 a gallon gasoline again by midsummer. But this time, it’s going to be different. Most Americans are going to bite the bullet and pay it.

The reason is simple: Employment prospects for most people have improved. That wasn’t the case not too long ago.

In late 2008 early 2009, the collapse in the price of gasoline was the result of a significant contraction in economic opportunity. Then, a guy could finally afford to put gas in his SUV but he no longer had a job to drive to.

And what of that third lingering cause?

It’s simple. The rise in domestic crude oil production is outstripping the ability of the infrastructure to store and process it.

That’s why you shouldn’t be surprised if the government begins to approve exports of the oil itself. Currently, that is essentially only allowed for the California heavy crude that does not have a sufficient domestic market.

But, as we have discussed previously, the use of tolling is likely to be phased in. This is the process of providing raw material (in this case crude oil) for processing elsewhere and then importing it back in as a processed product.

This is how the trading cycle, now centered on the export of oil products, will expand to include the export of oil itself. It is also how American refineries will cope with a double whammy -wanting to export but needing to satisfy an expanding domestic market. Refined products imported from one region will then figure in the export of the same products to others.

Refinery margins (the difference between the cost of production and the wholesale price; the actual source of refinery profits) will decide the direction of this trade flow.

In the end, this will support higher gas prices.

But it’s not all bad news. It will also provide a better return for investors in the pivotal refining sector.

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  1. Joel J. Carlson
    April 22nd, 2014 at 13:52 | #1

    Yes, higher profits from exports. However, your statement that it is coming from mature fields, is only partially true. REMEMBER: in the last 5 years, we have been told of oil discoveries of HUGE size. Also, let’s not forget, one mature field I’m sure you are referring to, is Alaska. However, they were only drawing form one field their. They haven’t touched multiple fields up there. So, no there is no reason for gas at $4.00 a gallon. ONLY GREED! We can thank Washington and our employees there for that!!!

  2. Bruce
    April 22nd, 2014 at 14:03 | #2

    Come on folks. Are we that stupid? Gas prices are going up because of greedy CEO’s “Chief Embezzling Officer’s” and corrupt politicians. If the wind changes direction they’ll use that as a reason for increasing gas prices….and just wait, they’ll be milking the situation in Ukraine to death as another reason and also to push fracking on the American people. Crooks all of them.

  3. April 22nd, 2014 at 14:15 | #3

    The main reason gas prices are going up is because of the Obama decisions on the way we generate power. He is destroying the coal mines, oil production and everything that have to do with it and all in the name of the environmental and his political ambitions.

  4. Terry schrock
    April 22nd, 2014 at 14:21 | #4

    But it still comes down to supply and demand, and if the demand decreases, and the supply increases, then the oil companies might have to “bite the bullet” so to speak. That would really not be a bad thing!!!!!

  5. Lee
    April 22nd, 2014 at 14:25 | #5

    NOT TRUE !!!

  6. Suzanne
    April 22nd, 2014 at 14:33 | #6

    Oh my ,Where do I start? Well for starters 4.00 a gallon blood suckers.There will be more unemployment HELLOoooo. The price of gas determains weather a man can work or not.Ive watched this happen in my state all too often. Also feed his family on what after gas ,theres not much left.My ol man works 45 hrs a week and travels 2 and a half hrs to do so. These prices are that of crooks and greedy money sucking pigs.I say pick one day no one drives a freaking car and let the blood suckers pay that price. Ive done my home work n if just for 1 day if it didnt work try again 2 days in a row.:)

  7. Suzanne
    April 22nd, 2014 at 14:35 | #7

    Their going to starve us all out, if we let them!!!!!

  8. Tim
    April 22nd, 2014 at 15:07 | #8


    Obama is destroying the coal mines? Suggest you do some reading and find out that cheap natural gas is the future for power generation in the USA. And all that coal is being shipped overseas to China and India. The old coal fired power plants are being replaced by newer gas
    plants, which has nothing to do with Obama. And since he will be out of office in 2 years what political ambitions dose this change give him? Stop trying to blame him for your made up fantasies.

  9. Don
    April 22nd, 2014 at 15:16 | #9

    Maybe oil produced from public lands should be required to be refined and stay in the US and not exported until prices hit a target price. The very least, royalties on public lands should be raised and the revenue applied to the National debt (assuming we can get a balanced budget agreement) More public lands should be opened up for development and exportation.

  10. Roy Ferrell
    April 22nd, 2014 at 15:25 | #10

    Unfortunately, the same common denominator of GREED, is alive and well. Pay it, don’t drive as much, or purchase a hybrid or electric car. Either option has it’s advantages. Same ol song and dance for the consumer, regardless. Greed is a bona fide member of all political parties so, let the good times roll!

  11. April 22nd, 2014 at 15:59 | #11

    Bullshit! I blended gasoline years ago worked for an oil company and I am here to tell you that is a lie. People need to wake up and realize we surpassed production OF OIL HERE IN THE USA OCTOBER 2013.NOW THE REAL QUESTION IS WHY IS GASOLINE GOING UP?? IT SHOULD BE GOING DOWN.THAT IS THE WAY MARKETS WORK OIL COMPANYS LIE TO US EVERY DAY WHEN ARE THE PEOPLE GOING TO RISE UP AND TAKE THEIR POWER AWAY FROM THEM!!!

  12. John Caravanserai
    April 22nd, 2014 at 16:08 | #12

    Hey Alberto, The environment belongs to everyone, not just Obama, not just the Democrats , every last one of us. Personally I’ll take clean water and air any day over small increases in gasoline prices. Don’t you realize the rest of the world pays per litre what we pay per gallon.
    You don’t want to turn America into country that looks like the Persian Gulf, that fish can’t even live in……………Wake up America, we’re still the best place to live but let’s keep it that way with cleaner air and water…….even Nixon who started the EPA understood what’s really important. As far as Obama’a political ambitions go,
    I’d say he’s probably pretty fed up w/ the lifestyle by now thanks to all you hatemongers. Just where do you think he plans to go from here anyway……..Arizona?

  13. Bruce
    April 22nd, 2014 at 17:21 | #13

    Natural gas may burn clean but the process of getting it out of the ground,accidents transporting it and storing it does irreversable environmental damage to the air,WATER,and soil and to the health of humans and wildlife living near the production areas.

  14. Dave
    April 22nd, 2014 at 17:25 | #14

    From what I can tell, oil industry has seen a big growth (boom) since Obama has been in office. He is not to be accussed of cramming green energy down our throats because that is not the case. Clean/Green Energy movement is stagnating, little or no growth in that area of economy as compared to Big Oil Business, which is seeing record profits and expansion. Billions of dollars being invested in Oil and Chemical business every year since Obama has been in Office. Texas expanding massively in this area. People may think Obama is in charge but as far as I can tell, big business is really the ones running things in the USA. I personally would have liked to see better batter technology giving electric cars a 300-400 mile range and faster recharging, and I would have liked to see solar power costs dropped by half by now. The progress towards green energy alternatives has been WAY TOO SLOW… The oil companies are still milking the hell out of the world due to their death grip on our lives and economies.

  15. April 25th, 2014 at 09:35 | #15

    These bastards! The rise in gasoline prices just boils down to three words about the producers: BECAUSE THEY CAN! They should all burn in hell.

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