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By Robert Rapier on Jan 27, 2009 with 5 responses

Why Gas Prices are Rising Again

Every time gas prices start to go up, my essay “Why Are Gas Prices Rising?” gets a lot of hits from Google searches by people looking for an explanation. Because the supply/demand dynamics have changed, that essay needs dusting off, especially in light of stories like this:

Pros puzzled by gas prices

Fuel industry pundits have been left scratching their heads at the recent jump in gas prices, which have increased despite plummeting crude prices.

“The nationwide average retail price of self-serve regular gasoline seems to be defying gravity this month,” according to American Automobile Association (AAA) Director of Public Relations, Geoff Sundtrom, “as it continued to rise in the face of sharply lower prices for crude oil and wholesale gasoline.”

Oil prices closed out at $34.78 per barrel last Friday, according to AAA, the lowest they’ve been since April 5, 2005, when the nationwide average retail gasoline price was $1.76 per gallon compared to Monday’s nationwide average of $1.842. Average nationwide prices jumped slightly to $1.848 on Wednesday. The statewide average is slightly higher at $1.851 per gallon. By this Friday, prices had risen to $46.47, according to The Associated Press.

First things first. Checking the EIA data, their numbers/trends don’t match up. Per the EIA, in April 2005 retail gas prices were $2.28 a gallon (Source) when West Texas Intermediate was trading at $52.98. In early 2009, retail gas prices (per the EIA) are at $1.84 with WTI hovering around $40. AAA is obviously using their own metrics, but a scan of the various EIA gas prices show a pretty consistent trend: Gas and oil prices both sharply down from 2005.

But, it shouldn’t surprise anyone that gas prices would be headed back up – even if oil prices are stagnant. Gasoline had over-corrected to the downside in relation to oil prices. In fact, crack spreads – a measure of the difference between the price of oil and the price of the products – did go negative in late 2008. That is unsustainable, and an indication that gas prices must correct to the upside (or refiners will start to cut production since they are losing money on every barrel). So why are gas prices rising? Because they fell too far. (Nobody ever seems to ask why gas prices fell so much in relation to crude oil; they only get excited when the opposite occurs).

There is another key factor to consider when comparing the behavior of gasoline and oil prices. I have seen them move in opposite directions on numerous occasions. Here is an example of when they might do that. Let’s presume that we have a glut of oil, but a refining bottleneck. In such a case, you would see little demand for oil, keeping the price low. But if refiners are having trouble keeping the gasoline market supplied, then gasoline prices will rise in relation to oil prices. This has taken place multiple times over the past few years, and can usually be understood if you watch the crude and finished product inventories reported each week in This Week in Petroleum.

Other factors that impact the price of gasoline include the strength of gasoline imports (primarily from Europe), and refinery utilization (both of which are reported weekly at the EIA). If gasoline demand is strong, and something happens to reduce the utilization number (e.g., hurricane), prices spike. If demand starts to slacken, you will see refiners start to dial back their utilization.

  1. By Screw OPEC on November 15, 2010 at 10:03 am

    Are you all Idiots????The definition of insanity is doing the same thing over and over again and expecting a different result. The price of gas impact every facet of the world’s economy, look at what history has taught us. When gas rose to over $ 4 a gallon the US economy, shout down. Guess what happens when you do not learn for the past failures in history? I am going on record stating “our government will willfully and purposely support the over inflation of oil and our economy will plummet to an unrecoverable point” Either freeze the price of oil and take it off the stock market or suffer a predictable economic disaster!!

  2. By BOB JOHNSON on March 1, 2011 at 12:13 am

    If you want the gas prices togo down…just stay home one day a week like sunday…walk to were you have to go or ride your bike…get to know your family..Town could reinstall the blue laws close stores …don’t sell cars,clothing house wares….but I belive if enough people just stay home and not travel 1 day a week it could lower gas prices…what
    do you think?

  3. By Stacey on July 9, 2011 at 11:29 am

    Okay, but what IS the reason the prices are heading back up this July? I don’t feel like there was a clear answer to that question in this report. The only thing that I got out of this article was that prices went down to quickly, but to me that isn’t any consolidation. The past two months all I have read is that gas relief is coming, oil has been released from reserves, oil refineries have been fired up, etc., etc… What the heck are gas prices going up for? The real reason is greed, as it always is, I am sure.

  4. By daniel on August 30, 2011 at 3:47 pm

    Is there any voice in America that could speak loudly enough to end or at least thwart the greed of local gas companies? Fuel here in the Seattle area (diesel) in particular has risen at one station 37 cents that’s correct 37 cents in the last two weeks. We pay 4.25 per gallon of diesel, why, in short greed. It never fell past 3.87 which was still about 70 cents short of where it should have been. Most stations never got below 4.09. From the high this year of 114 per barrel to the mid eightys, fuel should have been down about 82 cents a gallon. I think anything under or around 4 bucks is “palatable” to most and the oil companies know it. It really grinds me when they rise prices overnight when there is no apparent reason except greed of a select few that affects all.

  5. By janet on July 8, 2012 at 9:55 pm

    i think that since gas prices r on the rise again  after we had good prices for a while  why dont the people do something about the oil . we need lower prices and not higher the more the gas the less people will put into the ecomice  for other thing as eating out going to movies, or just having a little extra cash in there pockets. we dont need high price gas it bad for the med and low class people who cant afford it all the time .  it hard to beleive over nite the prices jump 10 cents a gallon thats crazy  what happen 

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