Latest / Energy Economics with Fexingo: Oil Prices, Renewables, and the Cost of Power / Why Gasoline Is Rising While Crude Oil Falls
Transcript
- Lucas: Here's a riddle for a Thursday in late July: The price of crude oil has dropped about eight percent over the past month, but the price you pay at the pump has gone up. Not by much, but it's up — from a national average of four dollars exactly to about four ten. Luna: So we're getting squeezed even as the main ingredient gets cheaper. That doesn't feel fair. What's the bottleneck? Lucas: The bottleneck is literally a refinery — and the seasonal chemistry of gasoline. Every summer, the EPA requires refiners to produce a 'summer blend' fuel that evaporates less in heat. It's more expensive to make because it requires different blendstocks and more processing. Luna: Right, I've heard about summer blend versus winter blend. But how much of a premium are we talking? Lucas: Typically ten to fifteen cents a gallon. Combine that with the fact that U.S. refinery capacity is still about a million barrels a day below pre-pandemic levels. The Energy Information Administration puts utilization around ninety-four percent right now — near maximum. When plants run that hard, any unplanned outage or maintenance sends margins soaring. Luna: So the crude drop gets absorbed by the refiners? They're keeping the spread wide? Lucas: Exactly. The crack spread — that's the difference between what a refiner pays for crude and what it gets for gasoline and diesel — has been hovering near five-year highs. WTI crude at eighty-four dollars is still historically high, but the refiner margin is even fatter. That's why the posted price at the station isn't falling. Luna: And we're in peak summer driving season. The American Automobile Association says July is the heaviest travel month. Demand is there, so stations have no incentive to cut prices. Lucas: That's the second leg. Gasoline demand in the U.S. last week was about nine point three million barrels a day — up one percent year-over-year. So you've got strong demand hitting a supply system that can't easily ramp up. It's the classic short-term inelasticity. Luna: Now what does this do to the broader inflation picture? We've seen core CPI and core PCE both cooling — June data showed core PCE ticking up just slightly to one hundred thirty point three, but still below year-ago levels. Yet headline CPI is sticky because of energy. Lucas: Sticky is the word. The ten-year breakeven inflation rate — that's the market's expectation for average inflation over the next decade — actually ticked up to two point twenty-six percent yesterday from two point twenty. Not huge, but the move tells you bond traders see gasoline prices staying elevated through the summer. Luna: So the Fed can't fully declare victory on inflation until they see energy quiet down. But if crude keeps falling, won't gasoline eventually follow? Lucas: History says yes, but with a lag. The typical pass-through takes two to four weeks. The problem is, we're still in the summer-blend window, which runs through September fifteenth. After that, refineries switch to cheaper winter blend, and we usually see a twenty to thirty cent drop per gallon. So real relief may not show up until October. Luna: That feels like a long time when you're filling up a tank. And I've noticed energy stocks aren't cheering the crude rebound either. The XLE, the energy sector ETF, is down one and a half percent over five days even though WTI futures are up about one point seven percent. Lucas: That disconnect is worth a full episode on its own. But the short version is: refiners are making great margins, but integrated oil majors like Exxon and Chevron are seeing their upstream profits squeezed because their realized prices lag spot crude. And investors are worried about demand in the second half, especially with China's economy slowing and Europe looking wobbly. Luna: You know, talking about this — the mechanics of why gas costs what it does — reminds me that most of us just see the number and groan. But understanding why it's happening makes it feel a little less random. Lucas: That's the whole point of this show. And honestly, if today's explanation was worth a coffee to you, that's the link — buy me a coffee dot com slash fexingo. It keeps the podcast ad-free and lets us dig into these supply-chain details without chasing clicks. Luna: Yeah, it's a small thing that makes a big difference for us. We really appreciate it. Lucas: So back to that timeline: if you're betting on cheaper gas, watch the calendar more than the crude chart. Once we pass Labor Day and refineries start cranking out winter blend, we could see regular fall below three seventy again by November, assuming no hurricane disrupts the Gulf Coast. Luna: That's a big assumption. Hurricane season is peaking right now. Lucas: True. The National Hurricane Center is already watching a tropical wave in the Atlantic. Any Gulf disruption would flip this whole story — snapping gasoline prices back up and sending refiners into scramble mode. But for now, the puzzle is that oil is down and gas is up, and the answer is chemistry, capacity, and timing. Luna: Thanks, Lucas. On next week's show, we'll look at whether the nuclear revival can actually replace baseload gas plants. See you then.