Why Are Gasoline Prices So High? (February 2009 Version).

Michael Giberson

So low, and yet so high.

It seems to be the way consumers feel about gasoline prices these days.  Yes, prices are down compared to a year ago, but everyone knows that crude oil prices have been going down lately while gasoline prices are up from their December 2008 lows.

From The Mercury News:

Crude oil is selling for the low price of under $35 a barrel. The precious black commodity is awash at storage tanks across the country. And drivers from New York to the Bay Area are motoring less and less as the economy continues to sink.

But the price of gas is going up and up and up — to $2.29 a gallon in California on Saturday, 25 cents higher than a month ago and 49 cents more than before Christmas.

What gives?

The Mercury News cites a number of factors, including maintenance work at refiners, mechanical glitches, and “the gradual conversion to summer blends of fuel” as among the factors. Also, the News said, much of the crude oil made into gasoline comes from South America or the Middle East, and prices there are about $10 bbl higher than the benchmark West Texas Intermediate (WTI) price most frequently cited in the (U.S.) press.

The Associated Press recently ran a story on the same theme, “If price of crude oil is dropping, why is cost of gas rising?“:

Crude oil prices have fallen to new lows for this year. So you’d think gas prices would sink right along with them.

Not so.

On Thursday, for example, crude oil closed just under $34 a barrel, its lowest point for 2009. But the national average price of a gallon of gas rose to $1.95 on the same day, its peak for the year. On Friday gas went a penny higher.

The AP story clarifies further the role that higher priced crudes from elsewhere play in this particular story:

The recession in America has dramatically cut demand for crude oil, and inventories are piling up. So prices for West Texas crude have fallen well below what oil costs from places like the North Sea, Saudi Arabia and South America.

That foreign oil sells in some cases for $10 more per barrel — and that doesn’t even include shipping.

Brent North Sea crude, which feeds some East Coast refineries — and therefore winds up at many gas pumps around America — now costs about $7 more per barrel than the West Texas crude. Deutsche Bank analysts say the trend should continue.

The WTI price normally trades at a premium to other grades, but a host of temporary factors have driven down the price of the WTI benchmark relative to other crudes. So the crude oil price cited most often in the press may not be the price paid for the crude oil that went into gasoline.

So long as crude oil prices stayed in their usual relationship, it didn’t matter much that the crude oil that went into west coast gasoline was from different places than the crude oil going into Gulf Coast gasoline or that reaching east coast refineries.  Refinery utilization is down, too, and other short term factors are in play (see the Styles and Rapier remarks cited below for more.) Over time these differences will tend to sort themselves out, and the normal relationship will return.  In the meantime, crude oil prices and gasoline prices will continue to look disconnected.

See also, Geoff Styles in The Other Stimulus, and Robert Rapier, Why Gas Prices are Rising Again.