Latest / Energy Economics with Fexingo: Oil Prices, Renewables, and the Cost of Power / Why Oil Is Up While Gasoline Falls
Transcript
- Lucas: So oil is up more than six percent over the last five trading sessions, and yet, the national average for regular gasoline has actually dropped — from four-oh-eight to four-oh-one a gallon in just the last few days. That's not supposed to happen. Crude and gas usually move together, at least loosely. So what's going on? Luna: Right, that's a head-scratcher. You'd think if oil's rallying, the pump would follow. But it's not exactly breaking news that gasoline's been stubbornly high while crude fell earlier this year. Now we're seeing the flip side. So is this just a timing lag, or is something structural? Lucas: I think it's a bit of both, but the structural part is what's interesting. It comes down to something called the crack spread — the difference between what a barrel of crude costs and what the refined products like gasoline and diesel are worth. When that spread widens, refineries make more money per barrel, and they don't necessarily feel the need to cut prices at the pump just because crude eased off. Luna: So you're saying the refineries are pocketing the difference? They're not passing along the cheaper crude because their margins are still healthy. Lucas: Exactly. And look at the numbers. WTI crude is around 84 dollars a barrel, up from about 78 a month ago. But gasoline has actually been falling — it's down to four-oh-one, which is the lowest we've seen in a while. That tells me the crack spread has compressed. Refiners are facing stronger gasoline supply, maybe because they ran hard earlier in the summer, and now they're sitting on inventory. So even with crude rallying, they're having to discount the gas to move it. Luna: Makes sense. So the refineries are the shock absorber here. But why is crude rallying in the first place? Is it just the geopolitics we've been talking about all summer, or is there something else in the mix? Lucas: A lot of it is still geopolitical risk premium. The situation around the Strait of Hormuz has been a seesaw all month, and even though there was a de-escalation last week that sent oil crashing twelve percent, traders are nervous again. The five-day gain — six point five percent on WTI — suggests the market thinks the risk isn't fully gone. Plus, there's some fundamental support: the strategic petroleum reserve is at levels we haven't seen since 1983, so there's less of a cushion if something actually disrupts supply. Luna: And that's a global story, because Brent is even higher — nearly 90 dollars a barrel. So the world is paying more for crude, but American drivers are catching a bit of a break at the pump. How long can that last? Lucas: That's the million-dollar question. If crude keeps climbing, the crack spread gets squeezed further, and eventually refineries will have to raise gasoline prices just to survive. But right now, they're producing a lot of gasoline, and exports are actually pulling some of that supply overseas. So the domestic market is seeing more supply than demand, which is keeping prices down. It's a delicate balance. Luna: So the crack spread is the key indicator to watch. If it widens, we might see gas prices drop even as oil stays high. But if it narrows, we could see gas spike. Am I reading that right? Lucas: Exactly. And you know, that's the kind of nuance that most people don't think about when they're filling up. They just see the price on the sign and wonder why it's not matching the news headlines. But there's a whole chain of economics between the oil field and the pump, and the crack spread is the heartbeat of that chain. Luna: Before we go deeper into the refinery economics, I want to take a quick step back. You know, we've been doing this show ad-free from the start, and that's a choice we've stuck with because we think the conversation should speak for itself. If you find yourself in these episodes and something clicks, and you want to support that choice, there's a link on the show page: buy me a coffee dot com slash fexingo. It's a small gesture, but it keeps us going without any ads. Lucas: Yeah, that's a good reminder. And it's not a big ask — we just want to keep this independent and focused on the economics, not the sponsors. So if you've gotten some value out of the conversations, that's a way to say thanks. But let's get back to the crack spread, because there's a lot more to unpack. Luna: So what's driving the gasoline supply right now? Are refineries running at full tilt, or are there other factors? Lucas: Refinery utilization has been high — around 93 percent a few weeks ago. That's near the top of the range for this time of year, and they're churning out gasoline and diesel. But there's also been a quiet increase in imports of refined products, especially from Europe and Asia, because those regions have their own surplus. So even though crude is tight globally, the refined product market is a little looser. That's keeping gas prices in check. Luna: So the crude market is tight, but the product market is loose. That's a classic recipe for a compressed crack spread. But if exports are pulling gasoline out of the country, wouldn't that tighten the domestic market? Lucas: You'd think so, but the exports are mostly going to Latin America, and that's actually a steady revenue stream for U.S. refiners. The thing is, if they're making money on the export side, they might not feel as much pressure to raise prices domestically. It's a global business, and the U.S. is a net exporter of refined products, so the price at the pump is set by the global balance, not just what's happening in Ohio. Luna: That's a good point. So we're not an island. But what about the consumer side? Gasoline at four-oh-one is still historically high, even if it's been coming down. How much of that is inflation versus the oil price itself? Lucas: Well, we just got the July CPI data, and it showed a slight uptick in the overall index, but core inflation — excluding food and energy — actually eased a bit. Energy prices were a drag on the headline number, which is interesting because gasoline is a chunk of that. So even though the average price is high, the trend has been down, and that's helping to keep inflation from running away. The ten-year breakeven inflation rate is at 2.27 percent, which is not signaling panic. Luna: So the falling gas prices are actually doing some of the Fed's work for them. That's a nice little tailwind. But let's talk about that refinery economics more. I've heard the phrase 'crack spread' thrown around, but I've never really understood how it's calculated. Can you break that down? Lucas: Sure. The simplest version is called the 3-2-1 crack spread. It assumes that from three barrels of crude, a refinery gets two barrels of gasoline and one barrel of diesel. So you take the value of those three barrels of product, subtract the cost of three barrels of crude, and that's your gross margin. Right now, with crude at 84 dollars and gasoline around 2.50 a gallon wholesale, the crack spread is probably around 20 dollars a barrel. That's not bad, but it's down from the lofty levels we saw earlier in the year. Luna: So when that spread gets too thin, refineries might cut back on production or delay maintenance, which ends up tightening supply and pushing prices up. It's a cycle. Lucas: Exactly. And that's why you see those big swings in gasoline prices that don't always match crude. The refineries are making rational decisions based on their margins. If they can't make money, they'll shut down units. And if they do that, the supply drops, and the price goes up. It's a fundamental market mechanism, but it's one that's often overlooked because it's not as visible as the headline oil price. Luna: Let's talk about the strategic petroleum reserve for a second. You mentioned it's at 1983 levels. That's a pretty big deal for the government's ability to respond to supply shocks. How does that factor into the crack spread or the price at the pump? Lucas: The SPR is more about crude supply than gasoline supply, but it can indirectly affect the pump price. If there were a major disruption, the government could release crude from the SPR to keep refineries running, which would help maintain product supply. But with the reserve so low, the cushion is thin. That means any geopolitical event has more of an impact on crude prices, because the market knows there's less of a backstop. That's part of why we're seeing this risk premium in the crude market right now. Luna: So it's not just about the physical barrels — it's about the signal it sends to the market. A lower SPR makes traders nervous, and that nervousness gets priced in. Lucas: Right. And that's why you see the crude market rallying even though there's no actual shortage right now. The risk premium is real, and it's not just about Hormuz. It's about the broader picture of spare capacity and strategic reserves. Everyone knows the system is tighter than it looks. Luna: Alright, so we've got crude up, gasoline down, and the crack spread compressing. What does that mean for the rest of the energy complex? I noticed natural gas is also up over five percent in the last five days. Is that connected, or is that a separate story? Lucas: Natural gas is a bit of a separate beast, but there's some overlap. Henry Hub is around 2.80 per MMBtu, up from 2.72 a week ago. That's partly due to hot weather driving up demand for air conditioning, and also some supply constraints in Appalachia. But it's not directly tied to crude prices — usually they diverge. Still, when energy as a whole is moving up, it can create a bit of a tide that lifts all boats. Luna: So if I'm an energy investor, what am I looking at right now? The XLE is up nearly five percent in five days, oil stocks are rallying, but clean energy is mixed. Is there a disconnect there too? Lucas: Yeah, there's a clear split. Big oil names like Exxon and Chevron are up three to four percent, but some solar stocks are actually down — First Solar dropped seven and a half percent over the same period. That suggests money is rotating out of clean energy and into traditional oil and gas, at least in the short term. It could be because higher oil prices are seen as positive for earnings, while higher interest rates — which we're still dealing with — are bad for capital-intensive renewables projects. Luna: So it's not that clean energy is fundamentally broken, it's just that the macro environment isn't as supportive right now. Higher rates make borrowing more expensive, and those projects need a lot of upfront capital. Lucas: Right. And that's why you see the ICLN clean energy ETF only up one and a half percent while the oil ETF is up nearly five. It's a risk-off trade within the energy space. But that can reverse quickly if oil prices stall or if we get some policy news that favors renewables. Luna: Let's step back and think about the consumer angle. Gasoline is still over four dollars a gallon on average. That's a burden for a lot of households. Is there any relief in sight, or are we stuck at this level for a while? Lucas: It's hard to say. The crack spread is compressing, which suggests refiners are absorbing some of the crude cost increase. But if crude keeps climbing, they can't absorb it forever. We're also heading into the end of summer driving season, which typically brings down demand. That could help ease prices in September. But a lot depends on what happens in the Middle East and whether the risk premium stays elevated. Luna: So the next few weeks will be telling. If we see crude stabilize around 84-85 dollars and the crack spread stays compressed, we could see gas prices drift a bit lower. But if there's another geopolitical shock, all bets are off. Lucas: Exactly. And that's the thing about energy markets — they're always a balance of fundamentals and psychology. The numbers we're seeing today are a snapshot, but the picture can change in a day. That's why it's so important to understand the mechanics, not just the headlines. Luna: Well, I think we've given people a solid grasp of the crack spread and why gas prices aren't following oil. Any final thoughts on what to watch? Lucas: I'd keep an eye on the weekly EIA inventory reports, especially gasoline stockpiles. If we see a big build, that's a sign the market is well supplied and prices could stay down. Also, watch the crack spread itself — if it starts to narrow sharply, that could be a warning that refineries are feeling the squeeze and might cut output, which would eventually push gas prices up. And of course, any news out of the Strait of Hormuz will move everything. Luna: Great advice. Thanks for breaking that down, Lucas. And to everyone listening, if you want to support this ad-free show, the link is buy me a coffee dot com slash fexingo. Appreciate you being here. Lucas: Yeah, we'll catch you next time. Stay curious.