Oil Down…Gas Up
What gives?
No shortage of discussion during the past six weeks has focused on the fact that even as reported oil prices have continued to decline, gasoline prices have continued to rise.
According to AAA, U.S. gasoline prices averaged $1.96 per gallon for the regular unleaded product on February 17, 2009. Some “experts” suggest a move toward $2.25, or higher, is likely in coming months. Wholesale gasoline prices have jumped more than 20% this year, while oil prices have fallen roughly 25%, closing near $35 per barrel yesterday.
Is there a logical explanation for this?
Two reasons
The first reason is that U.S. oil refiners have cut back on gasoline production since December. As of February 6, the latest data available, U.S. refinery capacity was used at an 81.5% rate, the lowest level in 17 years. By comparison, refineries were running at 87.4% of capacity in early December (USA TODAY).
The underlying premise of economics—supply and demand—does work sometimes. Less supply of any commodity typically means a higher price.
Why have refineries been cutting production? Most industry experts suggest that, given the sharp plunge in oil prices during the second half of 2008, refiners lost money on every gallon sold during the October to December period.
Note, however, that refineries are now profitable again. Should gasoline prices move slightly higher in coming weeks as many suggest, even as oil prices possibly stabilize, more gasoline production will likely push prices modestly lower again.
