Latest / Energy Economics with Fexingo: Oil Prices, Renewables, and the Cost of Power / Why Gasoline Stays High While Crude Oil Falls
Transcript
- Lucas: Luna, the strangest thing happened this week. Crude oil is down twelve percent from its peak, WTI is sitting around eighty-four dollars a barrel, and yet the national average for a gallon of regular gasoline just went up, to about four dollars and ten cents. That is not how the story is supposed to go. Luna: Right, and the headlines back in July were all about oil crashing, so you'd expect some relief at the pump. Instead, my local station has gone up a nickel since last week. What's actually going on? Lucas: So the first thing to understand is that the price of crude is only one slice of the pie. Historically, crude accounts for roughly half of what you pay at the pump. The rest is refining, distribution, taxes, and the station's own margin. When crude drops, those other costs don't automatically fall with it. They can even push the other way. Luna: So we're basically looking at a bottleneck somewhere between the barrel and the gas tank. What's the holdup this summer? Lucas: Refining capacity is the big one. The U.S. lost about a million barrels a day of refining capacity during the pandemic, and a lot of that hasn't come back. Plus we're in the middle of the summer driving season, which runs through Labor Day, and that's when gasoline demand peaks. Refineries are already running close to ninety-five percent utilization, and they can't stretch much further. Lucas: And here's a key detail: not all gasoline is created equal. The EPA and state regulators mandate different blends depending on the season and the region. California has its own summer blend, the Midwest has its own ethanol rules, and some metro areas require even stricter formulations. That means a refinery in Texas can't just ship a generic product to every station in the country. Luna: So even if crude is cheap, you still need the right kind of gasoline in the right place at the right time. And if there's a snap in that chain, prices stay high. Is that why the East Coast often gets hit harder? Lucas: Exactly. The Northeast in particular has to import a lot of its gasoline because the Colonial Pipeline can only carry so much, and a lot of the refineries that used to supply that region have shut down. So you're paying for the transport, and you're also paying for the fact that the region relies on the global market. When crude spikes, the importers have to bid higher, and those costs stick around longer. Luna: And then there's the Jones Act, right? That's the law that says goods shipped between U.S. ports have to be on U.S.-flagged, U.S.-built, U.S.-crewed ships. That makes it way more expensive to move gasoline from the Gulf Coast to the East Coast than it would be to just bring it in from Europe. Lucas: Right, and that's a huge factor in why the regional mismatch persists. You'd think a refinery in Texas could just send its gasoline to New York, but the shipping cost under the Jones Act can be double or triple what an international carrier would charge. So the East Coast often ends up importing from abroad, even when there's surplus supply in the Gulf. Lucas: And then there's the wholesale to retail lag. Stations don't change their prices every time crude moves. They tend to adjust slowly on the way down and quickly on the way up. That's not conspiracy, it's just that their costs are based on what they paid for the fuel that's already in the ground, not the current spot price. If they bought inventory last week at higher wholesale prices, they're not going to eat that loss just because crude dropped today. Luna: So the sticker price at the pump is more about the cost of replacing your inventory than the headline oil price. That makes sense. But what about the taxes and the station's own margin? How much of that four-ten is actually taxes? Lucas: Federal excise tax is eighteen point four cents a gallon, and state taxes average around thirty-two cents, but that varies a lot. California is up around seventy cents a gallon in taxes alone. On top of that, the station's margin is typically fifteen to twenty cents a gallon. So if you add it all up, taxes, distribution, and retail margin can be well over a dollar, sometimes closer to a dollar and a half. Lucas: Now, here's the thing: those fixed costs don't change with crude. So when crude drops from ninety-two dollars to eighty-four, a ten percent decline, the pump price might only drop by half a percent because the other components are sticky. And that's exactly what we're seeing now. Crude is down about eight percent from its July peak, but gasoline is actually up because the summer demand and refinery issues are pushing wholesale prices higher. Luna: It's almost like the oil price and the gas price are living in two different worlds. So, in a way, the consumer is getting a distorted signal from the headlines? Lucas: Totally. And that distortion has real economic consequences. The Fed watches gasoline prices closely because they hit consumers' expectations. Even if core inflation is cooling, a four-dollar gas price can make people feel like inflation is still out of control. That's one reason why the latest consumer sentiment numbers have been a bit jittery, even as the CPI data looks better. Luna: And that's not just psychology, right? Higher gas prices eat into disposable income, which affects everything from retail sales to how much people drive. We saw that in the early summer. So what would actually bring the pump price down? Lucas: The most direct lever would be bringing more refining capacity online. There are a few projects in the works, like expansions in Texas and Louisiana, but they take years and they're expensive. In the short term, it's about imports. If the global market stays balanced and tanker routes stay open, the Northeast and West Coast can bring in more product, which would help ease regional spikes. Lucas: But there's also a seasonal factor. After Labor Day, demand typically drops, and refineries switch to the cheaper winter blend. That usually relieves some pressure at the pump. So we could see gasoline prices dip into the high threes by October, assuming crude doesn't spike again and there are no major hurricanes. Luna: So we're kind of at the mercy of two things: the hurricane forecast and the global supply picture. And with Iran threatening tanker routes, that's not exactly a stable backdrop. Lucas: Right, and that's what makes this so tricky. You've got crude down on demand fears, but any disruption to the Strait of Hormuz — which we saw headlines about this week — could send it right back up. And then the pump price would follow, but with a lag. So the consumer would feel the pain twice: once on the way up and again on the way down, because retail prices don't fall as fast. Luna: You know, I was reading this morning that the average household is spending more on gasoline now than they were last year, even though the price per gallon is similar, because they're driving more. That really puts the whole thing in perspective. Lucas: Yeah, and that's a great point. The demand side matters as much as the price. If people are taking road trips and commuting more, the same price per gallon becomes a bigger burden. And that's why the disconnect between crude and gasoline isn't just a trivia question — it's a real hit to household budgets right now. Luna: So, before we keep going, I have to say, this kind of deep dive is exactly why I love doing this show. And I know we're not supposed to make big asks, but if someone listening found this useful and wants to help keep us going, you can find us at buy me a coffee dot com slash fexingo. No pressure, but it does help us stay ad-free. Lucas: Yeah, it's a small thing, but it genuinely keeps the lights on here. And speaking of lights, let's look at that long term picture. What happens if this refining constraint becomes a permanent feature of the market? Lucas: Some analysts argue that we're entering an era where gasoline prices are structurally higher because refining capacity is shrinking, not just in the U.S. but globally. Europe has shut down a lot of refineries too, and Asia is building new ones but they're focused on petrochemicals, not just fuels. So there's a real question of whether the system can handle a future demand spike, even with EVs growing. Luna: That's a sobering thought. So even if oil prices stay low, the pump price might not come down much. And that has implications for the energy transition too, because it makes the cost of driving a gas car relatively higher, which could accelerate EV adoption. But it also hits lower-income households harder. Lucas: Exactly. For many families, gas is a necessity, not a choice, so they can't just switch overnight. The policy response matters a lot here. Some states are looking at carbon pricing, others are trying to regulate refining margins. But short of a major capacity expansion, we're likely to see this disconnect persist through the rest of the year. Luna: So, if I'm a listener watching the news say 'oil drops 12 percent' and I look at my gas gauge, what should I actually think? Lucas: I'd say think about the wait. The pump price will eventually catch up, but it's going to lag the headline by a few weeks, and it won't fall by the same percentage. And if you live in a region with tight refining capacity, you might not see much relief at all. The real signal to watch is the wholesale gasoline price, not just the crude futures. If that starts dropping, then you'll know the pump is next. Luna: That's a good takeaway. So keep an eye on wholesale, not just the crude headline. And maybe don't fill up just yet if you can hold off a couple weeks. Lucas: Ha, exactly. And if you want to know more about your specific state's taxes or the local refining situation, the EIA has some great data. That's the Energy Information Administration, by the way. They publish a weekly gas price breakdown that's really easy to read. We'll link it in the show notes. Luna: Perfect. And hopefully the next time oil crashes, we'll see a little more of that at the pump.