Latest / Energy Economics with Fexingo: Oil Prices, Renewables, and the Cost of Power / Whats Driving the Divergence Between Oil and Gas Prices
Transcript
- Lucas: West Texas Intermediate crude closed yesterday at sixty-seven eighty-nine, down more than four percent over the past five sessions. Brent slipped to just under seventy-one. That's a meaningful move, especially when you consider that major oil stocks like Chevron and ConocoPhillips have also been under pressure, down roughly three to four percent in the same period. Luna: And yet, regular gasoline at the pump is still averaging three eighty-three a gallon. That's only down about eight cents from a couple weeks ago. So the big question is: why isn't the crude oil decline showing up at the pump? Lucas: That's exactly the puzzle I want to unpack. The short answer is that crude oil is only about half of what you pay for a gallon of gas. The rest is refining, distribution, taxes, and retail margins. But there are specific dynamics right now that are keeping that disconnect wider than usual. Luna: Let's start with refining. What's happening there that's keeping gasoline prices sticky? Lucas: Refinery margins — what refiners earn for turning crude into gasoline and diesel — have actually been quite strong. Part of that is because global refining capacity is still recovering from the pandemic-era closures, and part of it is seasonal. We're in the middle of summer driving season in the US, so demand for gasoline is high. And there's been a wave of planned and unplanned refinery maintenance, particularly in Europe and Asia, which has tightened supply. Luna: So crude goes down, but refiners are keeping their margins wide, capturing that spread. That makes sense. But there's also a geopolitical factor, right? The headlines this morning include a massive Russian strike on Ukraine. Lucas: Absolutely. Russia launched a large-scale strike on Ukrainian energy infrastructure yesterday, which sent a risk premium through the market. Poland scrambled jets, Finland restricted airspace. That kind of escalation doesn't necessarily push crude prices higher — we actually saw them fall — but it does reinforce the uncertainty around supply routes and refining capacity in the region. Luna: And that uncertainty tends to keep prices sticky. Refiners aren't eager to lower their prices when they see potential disruptions ahead. Lucas: Exactly. And there's another layer: the type of crude that's getting cheaper. WTI is a lighter, sweeter crude that tends to yield more gasoline. But the global benchmark, Brent, hasn't fallen as much. The spread between them has widened, which means that US refiners who can access discounted domestic crude are in a better position, but global pricing still anchors the gasoline market. Luna: That's something a lot of people miss. They see the headline crude price and assume that's what they're paying at the pump. But there's a whole supply chain in between. Lucas: And that supply chain is where the real story is. We should also talk about inventories. According to the latest Energy Information Administration data, US crude inventories have been building, which is bearish for crude prices. But gasoline inventories have actually been declining, which supports gasoline prices. So you have two different supply-demand pictures playing out simultaneously. Luna: So crude is getting cheaper because there's plenty of it, but gasoline is staying expensive because there's less of it and demand is strong. That's the disconnect in a nutshell. Lucas: Right. And then you add the macroeconomic backdrop. CPI came in at 334.0 for May, up from April. Core CPI also ticked higher. That suggests inflation is still sticking around, partly because energy costs are not falling as fast as the headline crude numbers would suggest. The ten-year breakeven inflation rate is at 2.23 percent, down just a tick from the previous reading, so markets are pricing in persistent inflation. Luna: Which brings us to the broader question: if oil prices continue to fall, will we eventually see lower prices at the pump? Or are there structural reasons that might keep gasoline elevated? Lucas: I think there are structural reasons. Refining capacity has not kept pace with demand growth, especially for the more complex refineries needed to process heavier, dirtier crudes. And there's the energy transition angle — many refiners are hesitant to invest in new capacity because they see a long-term decline in fossil fuel demand. That creates a kind of self-fulfilling tightness. Luna: If walking through the economy with us has made something click about how oil and gasoline prices actually work, and you want to help keep these conversations ad-free and accessible, listener support is what makes that possible. We're independent, no sponsors, just curious listeners who chip in. Lucas: Yeah, exactly. If you find value in breaking down these connections every day, you can support the show at buy me a coffee dot com slash fexingo. That's all lowercase. It really does help us keep the lights on and avoid the ad-reads. Luna: Okay, back to the gasoline puzzle. So if refining capacity is structurally constrained, what does that mean for the rest of the summer? Lucas: I'd expect gasoline prices to remain relatively sticky even if crude drifts lower. The EIA is forecasting that US gasoline demand will average around 9.2 million barrels per day this summer, which is in line with last year. Meanwhile, refinery utilization is around 93 percent, so there's not much spare capacity. Any unplanned outage could spike prices quickly. Luna: And we've already seen some of that. There was a fire at a refinery in the Midwest a couple weeks ago that briefly pushed regional gasoline prices up. Lucas: Right. And it doesn't take much. The other factor is export demand. US refiners have been exporting record amounts of gasoline and diesel to Latin America and Europe, where supplies are tight. That reduces domestic inventories and supports prices here at home. Luna: So even if we produce enough gasoline to meet domestic demand, if we're shipping a lot of it overseas, the price doesn't come down. Lucas: Exactly. And that's been a consistent theme for the past couple years. The US is a net exporter of refined products, and that creates a global pricing dynamic that doesn't always align with domestic crude prices. Luna: Let's talk about the clean energy side. The sell-off in oil hasn't exactly lifted solar and wind stocks. First Solar is down nearly seven percent on the week, and the Invesco Solar ETF is basically flat. What's going on there? Lucas: Clean energy stocks are dealing with their own headwinds. Interest rates remain elevated — the ten-year yield is still above four percent — and that hurts the economics of large solar and wind projects because they require significant upfront capital. Lower oil prices don't really help them because they compete more with natural gas. Luna: And natural gas prices are actually up a bit this week, around three twenty per MMBtu. So gas-fired power is still relatively cheap. Lucas: Right. The Henry Hub natural gas price is at three twenty, up about half a percent on the week. That's still low enough to make gas plants economically attractive versus renewables in many markets, especially when you factor in the intermittency issue. So there's no clean energy tailwind from the oil sell-off. Luna: And the broader market is also dealing with a chip rout — Samsung and SK Hynix are down over seven percent today, which is dragging down tech and growth stocks, and clean energy is often lumped into that growth category. Lucas: Exactly. So you have multiple forces working against clean energy stocks: higher interest rates, cheap natural gas, and a risk-off sentiment in tech. The oil decline is almost irrelevant to them. Luna: Okay, so to sum up: crude oil is falling because of ample supply and some demand concerns, but gasoline is sticky because of strong refining margins, tight product inventories, export demand, and geopolitical risk. And clean energy is not benefiting from the oil sell-off because its drivers are entirely different. Lucas: That's the story. And I think the key takeaway is that you can't just look at the crude price and assume you know what's happening at the pump or in the energy sector. The supply chain matters, the product market matters, and the macro environment matters. It's a complex system. Luna: And for listeners who want to understand that system better, that's what we're here for every day. Thanks for sticking with us through this one. Lucas: Next time we'll dig into the natural gas market, because that's been quietly moving in its own direction as well. Until then, take care.