Latest / Energy Economics with Fexingo: Oil Prices, Renewables, and the Cost of Power / How Gasoline Prices Defy Falling Crude
Transcript
- Lucas: So here's a puzzle, Luna. WTI crude has dropped from eighty-six dollars a barrel to under eighty-four in the last week. Brent is down more than four dollars from its recent peak. And yet, the national average for a gallon of regular gasoline actually ticked up, from four-oh-five to four-oh-eight. Luna: That's the kind of number that makes people scream at the news. How does crude fall and gas go up? Lucas: Right. And it's not just a one-week blip. We've done episodes about this disconnect before, but today I want to dig into the single biggest reason: it's not crude, it's the refining process. The spread between what you pay for crude and what you can sell gasoline for, the crack spread, is doing something interesting. It's widening even as crude softens. Luna: So refiners are making more money per barrel? That seems backwards if oil is cheaper. Lucas: You'd think, but here's the thing. Refining margins depend on the difference between input costs and output prices. When crude drops, refiners' input costs fall. But the wholesale price of gasoline hasn't fallen nearly as much, partly because of tight supply. That gap, the crack spread, has actually expanded. And that's why the pump price is sticky. Luna: But why is gasoline supply tight if crude is plentiful? Aren't refineries running flat out? Lucas: Most are, but there's a structural issue. The U.S. lost a lot of refining capacity in recent years, especially the older, more complex plants that were costly to upgrade. A few big ones closed in 2020 and '21. Since then, demand has come back, but capacity hasn't fully. So we're running at very high utilization rates. When something breaks down or a plant goes into maintenance, there's no slack. Prices spike. Luna: So it's basically a supply crunch at the refinery level. But you mentioned geopolitical risk too, right? The headline about U.S. strikes on Iran was driving oil prices up earlier today. Lucas: Exactly. Mortgage rates jumped today partly because of that headline. Oil got a bid, and that's feeding into the wholesale gasoline market as well. But even before today, the risk premium was baked in. Traders are pricing in a chance of supply disruption in the Strait of Hormuz, even if the probability is low. That premium doesn't disappear just because crude pulls back a few percent. Luna: Let's talk numbers. How wide is the crack spread right now compared to, say, a month ago? Lucas: Well, we don't have the exact number in our live data, but we know that the five-day change on WTI was plus four and a half percent, while gasoline futures have been even firmer. When crude drops, gasoline doesn't follow one-for-one. The crack spread is probably at its widest in months. That's a sign that refiners are the ones capturing the value, not the oil producers. Luna: That's a shift from the narrative we've had all summer, where oil producers were the winners and refiners were getting squeezed. Now it's flipped. Lucas: Totally. Look at the exchange-traded funds. XLE, the energy sector fund, is up two and a half percent over five days. But XOP, which holds exploration and production companies, is up only about two percent. Meanwhile, refiners like Marathon Petroleum or Phillips 66 — we don't have their tickers in our data, but the point is, refining margin expansion is the story right now. Luna: So if crack spreads are widening, that means refiners are passing on the cost to consumers. Is there any relief coming? Lucas: A few things could help. One, if geopolitical tensions ease, the risk premium comes out, and that would pull wholesale gasoline down. Two, as we move into autumn, demand typically falls, and refineries switch to cheaper winter-blend gasoline. That usually brings pump prices down a bit. But the big wildcard is refinery reliability. If we see another outage, prices could stay high. Luna: And what about the consumer? Four-oh-eight is still below the four-dollar mark in some states, but above in others. How much of that is just inflation versus this refining bottleneck? Lucas: Good question. The core consumer price index, which strips out food and energy, is up only about a tenth of a point. So inflation is cooling. But energy prices are a different beast. The PCE price index, the Fed's preferred gauge, also shows a small uptick. I'd say the refining bottleneck is the main driver, not broad inflation. It's a supply-side issue. Luna: So when you hear politicians blaming OPEC or the president for gas prices, it's really more about refinery capacity and the crack spread. Lucas: Precisely. OPEC influences crude, but the pump price is set in the wholesale market, which is heavily influenced by how much gasoline refineries can actually produce. And right now, they're producing at full tilt, but it's not enough. That's the structural story that doesn't get enough attention. Luna: It's fascinating how a seemingly simple consumer price is actually a complex chain of global trade, industrial capacity, and geopolitics. Lucas: Yeah, and that's why we do this show. Speaking of which, we've been getting a lot of questions from listeners about how we keep doing this without ads. A handful of you chip in monthly through buy me a coffee dot com slash fexingo, and that literally funds making this many of these episodes. It's a small group, but it means we can stay independent and dig into these topics without worrying about sponsors. Luna: Honestly, that support is what lets us do deep dives like this one. We really appreciate it. Lucas: So back to the question of whether pump prices will ease. The forward curve for crude suggests a slight decline later this year, but gasoline futures are still elevated. If crack spreads stay wide, it's hard to see big drops at the pump. That's the takeaway. Luna: So for the average driver, what's the one thing to watch? Lucas: Watch refinery utilization rates and any news about unplanned outages. Those are the real swing factors. Crude price moves are headline-grabbing, but the refining margin is what actually reaches your wallet. Luna: And maybe keep an eye on the geopolitical situation in the Middle East, because that risk premium isn't going away overnight. Lucas: Exactly. So next time you fill up, you'll know it's not just the oil price. It's the whole refining system working behind the scenes.