Latest / Energy Economics with Fexingo: Oil Prices, Renewables, and the Cost of Power / How Gasoline Prices Stay High While Crude Slides
Transcript
- Lucas: So, Luna, we keep seeing this headline that oil prices are sliding, but the average gas price in the U.S. has actually ticked up to four oh eight a gallon. That just feels wrong to most people. Luna: It does. And WTI is down to about eighty-three ninety a barrel, Brent around eighty-eight. So how does that translate to higher prices at the pump? Lucas: The short answer is: crude is only part of the story. The bigger driver right now is refining. We've had a few years of underinvestment in refinery capacity, especially in the U.S., and when there's a hiccup — a planned turnaround, a minor outage, a shift to summer blends — the margin for refiners balloons. Luna: So the gap between crude and gasoline is basically the refiner's profit? Lucas: Exactly. That crack spread, the difference between what a barrel of crude costs and what the refined products sell for, has been unusually wide. A few weeks ago, it was north of thirty dollars a barrel for gasoline. That's massive. Historically, it's often in the teens. Luna: And that's why we see gasoline stick at four dollars even when crude dips? Lucas: Right. The retail price moves with the wholesale market, and that wholesale price is set by refiners who are enjoying these fat margins. They're not going to give that up just because crude slipped a couple of dollars. Luna: I remember we did an episode last year about gasoline staying high. But this feels like there's a specific capacity angle now. Lucas: Yeah, and I think the current story is really about the Gulf Coast and the East Coast. The Gulf has plenty of refining capacity, but pipelines to get product to the East Coast are constrained. So you see regional price spikes. Luna: Is that why some states are paying way above the national average? Lucas: Exactly. California, for example, has its own boutique fuel requirements, plus a carbon price, so gas there is always higher. But even in the Southeast, if a refinery goes down unexpectedly, prices can jump ten to twenty cents overnight. Luna: That sounds frustrating for drivers. And also for policymakers who are trying to talk down inflation. Lucas: It's a real headache. CPI for July came in at three hundred thirty-two point eight, up a touch from the prior month. And core CPI, which excludes food and energy, is actually running hotter. So energy isn't driving the inflation print right now, but it's still a political issue because people feel it every week. Luna: Sure. So if refineries are the bottleneck, why don't we just build more? Lucas: That's the multi billion dollar question. New refineries are incredibly expensive — think ten billion dollars plus, and years of permitting. Plus, the long-term shift to electric vehicles makes investors hesitant. They don't want to sink that much capital into a business that might be shrinking in twenty years. Luna: So we're stuck with the capacity we have. And that means prices are more sensitive to any disruption. Lucas: Exactly. And we saw that earlier this year when a few refineries had unplanned outages. The market just doesn't have enough slack. Even a one-percent drop in utilization can move the needle. Luna: Is there any relief coming? Maybe the switch back to winter blends in the fall? Lucas: That's a seasonal factor. Winter gasoline is cheaper to produce because it has a higher Reid vapor pressure, so it doesn't need those expensive butanes and alkylates. Historically, you see a bit of a dip in gas prices after Labor Day. But the refining margin story could keep that from being dramatic. Luna: So the gap might persist for a while? Lucas: I think so. As long as crude stays in this range and refinery utilization stays tight, we're likely to see gasoline prices remain above four dollars in many areas. And even if Brent dips to eighty-five, the crack spread can compensate. Luna: Let's talk about the strategic petroleum reserve for a second. You mentioned that earlier. It's still at those low levels, right? Lucas: Yeah, the SPR is around three hundred and fifty million barrels, well below the historical average. That's a lot less of a buffer if there's a supply shock. But the administration has been slowly refilling it, taking advantage of lower prices. Luna: But if refiners are the bottleneck, does the SPR even help with gasoline prices? Lucas: Good point. A release of crude wouldn't necessarily lower gas prices if the constraint is on the refining side. It could actually just raise refiners' margins. That's the nuance that gets lost in political messaging. Luna: So what would actually bring gas prices down? Besides a recession. Lucas: A few things. One is a drop in crude below seventy, which would put pressure on margins. Another is a significant increase in refining capacity, which takes years. And a third is a change in environmental regulations, but that's politically fraught. Luna: So for the average driver, it's probably a sticker shock for a while longer. Lucas: Yeah, and I think we're going to see more regional volatility. There's also the global angle: Europe is facing diesel shortages, and that pulls on the same refining pool. So we're not just competing with U.S. drivers; we're competing with the world. Luna: It's a reminder that energy policy is really industrial policy. Lucas: Absolutely. And that's one of the reasons we do this show. It's easy to look at a price tag and get frustrated, but the underlying mechanics are fascinating. Luna: Yeah, I mean, I'm not an economist, but this show has really helped me see the connections. Lucas: And if you listen to this show every day, you're probably making some of those connections too. That's exactly why we're able to keep doing this, ad-free, thanks to listeners like you who support us. If you've gotten value from our episodes, you can help keep us going by buying us a coffee at buy me a coffee dot com slash fexingo. Luna: It genuinely makes a difference. Even a small monthly contribution helps us keep the lights on. Lucas: So, back to the market. As we head into September, watch the hurricane season. A major storm hitting the Gulf Coast could take out a chunk of refining capacity in one swoop, and that would be the next big jump in gas prices. Luna: That's a good point. We saw that with Hurricane Harvey in 2017. Lucas: Exactly. So keep an eye on the Atlantic. But for now, the story is really about refining margins and that stubborn gap between crude and gas.