Gas prices rise again to record, but the driver is refineries, not oil prices

Another week, another record high for gas prices. And there seems to be no immediate relief in sight.

The average price of regular unleaded gas rose a quarter last week to a record $4.86 on Monday, the AAA said. This represents an increase of 59 cents more than a month ago and $1.81 more than a year ago.

“After a week of rising gas prices in almost every possible city, state and area, more bad news is on the horizon,” said Patrick De Haan, head of oil analysis at GasBuddy. “Now it looks like not if, but when, will we hit that psychologically critical national average of $5.”

Many states are already above $5 a gallon. The top 10 states with the most expensive gas are: California ($6.34), Nevada ($5.49), Hawaii ($5.47), Oregon ($5.41), Washington ($5.40) , Illinois ($5.40), Alaska ($5.37), Washington, D.C. ($5.06) and Michigan ($5.05).

Most people blame higher oil prices, but the real driver of higher prices may surprise you. It is lack of refining capacity.

How much does oil affect gas prices?

About half the price of a gallon of gas comes from oil, and oil prices remain near their highest levels since 2008, in part due to tight supply and rising demand.

After being burned in 2020, when economies around the world shut down and demand for oil plummeted, oil producers were slow to ramp up production. The Organization of Petroleum Exporting Countries and its allies, collectively known as OPEC+, decided last week to ramp up oil production slightly. This may help limit oil prices, but it is unlikely to move the needle on gas prices.

CHICAGO, ILLINOIS – MAY 10: A sign displays gas prices at a gas station on May 10, 2022 in Chicago, Illinois. Across the country, the average price of a gallon of regular gasoline hit a record $4.37 a gallon today. (Photo by Scott Olson/Getty Images) XMIT ORG: 775811097 ORIG FILE ID: 1396549871

That’s because “increasing crude oil supplies do little to address the global shortage of refining capacity,” said Natasha Kaneva, head of global commodities at JPMorgan.

What is refining and what does it have to do with my gas price?

Refining breaks down crude oil into products we use every day. On average, US refineries produce, from a 42 gallon barrel of crude oil, about 19 to 20 gallons of gasoline; 11 to 13 gallons of distilled fuel, most sold as diesel; and 3 to 4 gallons of jet fuel, according to the Energy Information Administration.

What consumers see quoted as the price of oil is what refiners pay for oil. Refineries then turn that oil into products and sell them. Refiners’ prices for these fuels are closer to what consumers pay. And those prices are closer to $250 to $280 a barrel, said Daniel Milan, managing partner at Cornerstone Financial Services.

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“That’s what we look at because that’s what the consumer pays, and that’s more than double the cost of a barrel of oil,” he said.

Why is there a shortage of refining capacity?

When COVID-19 hit and world economies shut down, demand for oil and gas plummeted, so many companies closed their factories. Others were hit by bad weather. Some companies have stopped investing in refineries due to uncertainty about how the transition to green energy would affect their business. When Russia invaded Ukraine, more refineries in Russia were shut down.

All this led to a lower refining capacity. Existing refineries are operating at near-full capacity but have failed to keep up with demand and refinery margins have increased, said John Mayes, vice president of energy consulting firm Turner, Mason & Co.

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The difference between the purchase price of crude oil and the sale price of finished products, or the so-called crack spread, closed Friday up 2.7% to $60.54, close to a record high, he said. the EIA. The crack spread is seen as an indicator of the short-term profit margin of oil refineries.

Why don’t we reopen or build more refineries if they are so profitable now?

“It takes many months of planning, work and money to restart one and companies need to make sure there is long-term demand,” Mayes said.

And with the push for electric vehicles, many companies may not believe the demand will be there, some analysts said.

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Two million electric cars sold worldwide in the first quarter, up three-quarters from the same period a year earlier, according to the International Energy Agency’s May report.

What does this mean for consumers and gas prices?

To better gauge the direction of gas prices, consumers should look at refinery prices, not oil prices and not OPEC+ production increases.

“The size of the production increase is irrelevant if there is not enough capacity to distill that crude oil into clean products,” Kaneva said.

She predicts the national gas average will rise to $6.20 a gallon this summer.

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The only respite for drivers is that at some point they will turn down record gas prices and demand will drop and prices will follow.

“But we’re not there yet,” Andrew Gross, a spokesman for the AAA.

Medora Lee is a finance, markets and personal finance reporter for USA Today TODAY. You can contact her at mjlee@usatoday.com and subscribe to our free Daily Money newsletter for personal finance tips and business news every morning Monday through Friday.

This article originally appeared in USA TODAY: Why Gas Prices Are Up Again and Why Is There No Relief in Sight?

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