- Gas prices continue to climb to record highs.
- So far, most of the blame has been on low oil supply.
- But some analysts are saying, the real problem is low refining capacity.
Another week, another record high for gas prices. And there seems to be no immediate relief in sight.
The average price for regular unleaded gas surged by a quarter in the past week to a record $4.86 on Monday, AAA said. That’s up 59 cents more than a month ago, and $1.81 more than a year ago.
“After a blistering week of gas prices jumping in nearly every town, city, state and area possible, more bad news is on the horizon,” said Patrick De Haan, head of petroleum analysis at GasBuddy. “It now appears not if, but when, we’ll hit that psychologically critical $5 national average.”
Many states are already above $5 per 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’s 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 have been lingering near the highest levels since 2008 partly because of short supply and soaring demand.
After getting burned in 2020 when economies around the world shut down and oil demand plunged, oil producers have been slow to ramp up production. The Organization of Petroleum Exporting Countries and its allies, collectively known as OPEC+, last week decided to slightly accelerate oil production. That may help cap oil prices, but it’s unlikely to move the needle on gas prices.
That’s because “increasing crude oil supply does little to solve the global shortage of refining capacity,” Natasha Kaneva, JPMorgan head of global commodities, said.
What’s refining and what has that got to do with the price of my gas?
Refining breaks down crude oil into products we use every day. On average, U.S. refineries produce, from a 42-gallon barrel of crude oil, about 19 to 20 gallons of motor gasoline; 11 to 13 gallons of distillate fuel most of which is sold as diesel fuel; 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 the refineries pay for oil. Refineries then transform that oil into products and sell those. Refiners’ prices on those fuels are closer to what consumers pay. And those prices are closer to $250 to $280 per barrel, Daniel Milan, managing partner at Cornerstone Financial Services, said.
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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 struck and world economies closed, demand plunged for oil and gas so many companies closed their plants. Others were hit by bad weather. Some companies stopped investing in refineries because of uncertainty over how the transition to green energy would affect their business. When Russia invaded Ukraine, more refineries in Russia were taken offline.
All of this has led to less refining capacity. Existing refineries are operating at near maximum capacity, but they haven’t been able to keep up with demand, and refinery margins have widened, said John Mayes, vice president at energy consulting firm Turner, Mason & Co.
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The difference between the purchase price of crude oil and the selling price of finished products, or so-called crack spread, closed Friday up 2.7% at $60.54, near a record high, EIA said. 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’re so profitable now?
“It takes many months of planning and work and money to restart one and companies have to be sure there’s long-term demand,” Mayes said.
And with the push to electric vehicles, many companies may not believe the demand will be there, some analysts said.
Two million electric cars sold worldwide in the first quarter, up by 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 where gas prices are headed, consumers should be watching refineries’ prices, not oil prices and not OPEC+ production increases.
“The size of production increases is irrelevant if there is not sufficient capacity to distill that crude oil into clean products,” Kaneva said.
She predicts the national average for gas will rise to $6.20 per gallon this summer.
The only respite for drivers is at some point, they’ll balk at record high gas prices and demand will drop and prices will follow.
“But we’re not there yet,” Andrew Gross, AAA spokesperson.
Medora Lee is a money, markets, and personal finance reporter at USA Today TODAY. You can reach her at firstname.lastname@example.org and subscribe to our free Daily Money newsletter for personal finance tips and business news every Monday through Friday morning.