Latest / Energy Economics with Fexingo: Oil Prices, Renewables, and the Cost of Power / Why Gas Prices Ignore Falling Oil Prices
Transcript
- Lucas: So gasoline is averaging four dollars and five cents a gallon, up a couple of cents from last week, while crude oil is actually climbing. WTI is up about two and a half percent over the last five days, and Brent is up more than three and a half. And yet, if you ask most drivers, they probably assume the opposite is happening. Luna: Right, it feels like the pump price should fall when oil drops, but it doesn't. And this week, oil isn't even dropping. It's rising. So what's going on? Lucas: That's exactly the puzzle. And before we dig into it, a quick note on something that keeps this show running. We deliberately don't run ads on these episodes. If you've been walking through the economy with us and find it useful, you can support that choice at buy me a coffee dot com slash fexingo. It's entirely voluntary, but it helps us keep the whole thing ad-free. Luna: Yeah, and we're really grateful for that. It means we can spend the whole ten minutes on the actual economics, not on mattress ads. Lucas: Exactly. So let's get into it. The core issue here is that gasoline prices are set by refining margins, not just by the price of crude. And right now, those margins are unusually wide. That's why you see this disconnect. Luna: So the refiners are making more money per barrel, even when oil goes up? That seems counterintuitive. Lucas: It does, but it's actually pretty straightforward once you break it down. Refiners buy crude oil, they process it into gasoline and diesel, and they sell those products. The difference between what they pay for crude and what they get for the refined products is their margin. And that margin has been expanding, partly because of a global diesel shortage. Luna: A diesel shortage? I thought we were talking about gasoline. Lucas: Well, diesel is a big part of the story. Refiners can shift their output between gasoline and diesel depending on which one is more profitable. And right now, diesel prices are strong globally, especially in Europe and Asia. So refiners are prioritizing diesel production, which means less gasoline supply, which keeps gasoline prices higher than they'd otherwise be. Luna: So it's a supply problem on the gasoline side, driven by global diesel demand. That's a fascinating ripple effect. Lucas: Exactly. And there's another layer here. On the Gulf Coast, there's been a refining glut. We talked about that a few episodes back. There's more refining capacity than there is crude to process, or maybe more capacity than the market needs. That sounds like it should push prices down, but it's actually pushing them up in a weird way. Luna: How does more capacity lead to higher prices? That seems backwards. Lucas: You'd think so, but it's about who's running and who's not. Older, less efficient refineries on the Gulf Coast are struggling to compete with the bigger, more modern ones. Some of them are running at reduced rates or even shutting down. So while there's a lot of capacity on paper, the effective supply of gasoline is actually tighter than it looks. Luna: So it's a capacity that isn't fully operational, which limits potential output. Got it. Lucas: Right. And that's on top of the geopolitical stuff. Brent is trading around ninety-five dollars a barrel, while WTI is around eighty-seven. That's a wider than normal spread. It reflects the fact that there's more crude available in the US than there is globally, partly because of sanctions and shipping constraints elsewhere. Luna: So the US has its own crude, but it can't easily export it all, and the global market is tighter. That keeps Brent higher, and that affects gasoline prices here too, because US refiners are competing with international buyers for crude. Lucas: Precisely. And when you combine that with the fact that gasoline demand is still pretty strong in the US, you get this situation where the pump price stays stubbornly above four dollars, even when crude dips or rallies. Luna: So what's the actual number on refining margins right now? Is there a way to quantify it? Lucas: There is. The so-called crack spread, which is the difference between crude oil futures and refined product futures, has been sitting well above its historical average. For gasoline, it's been running maybe fifty to seventy percent higher than the five-year average. That's a big deal. For diesel, it's even wider. Luna: That's significant. So refiners are really cashing in. But is that something that lasts, or is it a temporary squeeze? Lucas: Tough to say. The global diesel shortage is tied to a few things, including sanctions on Russian refined products and some refinery outages in Asia. Those aren't going to be fixed overnight. But if the US economy slows down, diesel demand could drop, and that would ease some of the pressure. Luna: So we might be stuck with high gas prices for a while, at least until the diesel market balances out. Lucas: That's the sense I get. And it's worth noting that the broader inflation picture is also in play. Core CPI is still running a bit hot, and while energy is a volatile component, the fact that gasoline is staying high isn't helping the Fed's efforts to get inflation down to target. Luna: I was going to ask about that. How much of the inflation story is energy right now? Lucas: Energy is a smaller share of core CPI than it used to be, because core excludes food and energy. But gasoline is a big part of headline CPI, and that's what consumers feel. So even if the Fed looks at core, the political and psychological impact of four-dollar gas is huge. Luna: And that's one reason why this gets so much attention, even though it's a relatively small slice of the economy. Lucas: Exactly. And there's another angle. Look at the energy stocks. The XLE is up about one point seven percent over the last week, but the oil producers are doing even better. ConocoPhillips is up five point seven percent in five days. That's a big move. The market is clearly rewarding the producers, not the refiners, and that's a shift from some of the recent episodes where refiners were the stars. Luna: So the producers are winning now. But what about clean energy? ICLN is down nearly three percent this week. That seems to be the opposite direction. Lucas: Right. The clean energy index is down about two point nine percent for the week, and solar stocks like First Solar are down one point six percent. That's likely a rotation out of clean energy and into more traditional oil plays, especially when crude is rising. But it's a bit of a head-scratcher, because higher oil prices should theoretically make renewables more competitive. Luna: Right, but the market doesn't always act logically in the short term. Maybe it's more about interest rates or policy uncertainty. Lucas: That's probably part of it. But the key takeaway for this episode is that the gasoline price is not just a function of what you see at the pump vs. the headline crude number. It's a complex web of refining margins, global diesel demand, and regional supply dynamics. Luna: So if someone wants to understand why gas is four dollars, they should look at the crack spread, not just the oil price. Lucas: Exactly. I think the best way to put it is: the oil price is the ingredient cost, but the gasoline price is the menu price. And right now, the kitchen is adding a big markup. Luna: That's a great analogy. So what should we be watching for in the next few months to see if this changes? Lucas: Keep an eye on refinery utilization rates, especially on the Gulf Coast. If those start to climb back to normal, that could signal more gasoline supply. Also watch the diesel crack spread. If it narrows, we might see more gasoline production. And of course, any change in the global demand picture, especially from China, could shift things. Luna: And for now, it sounds like we're in for a period where gas prices are sticky. That's a tough pill to swallow for consumers. Lucas: It is. But understanding the mechanics behind it at least helps make sense of it. And that's really what we try to do here, every episode, without any ads getting in the way. Luna: And if you want to keep it that way, you know where to find us.