Latest / Energy Economics with Fexingo: Oil Prices, Renewables, and the Cost of Power / Why Gas Prices Are Stubborn Despite Oil's Plunge
Transcript
- Lucas: Oil has had a rough week. West Texas Intermediate is at 87 dollars and change, down seven percent in five days. Brent's down even more, nearly eight percent. But pull into any gas station and you'd barely know it. Luna: Yeah, the national average is sitting at 4.47 a gallon. That's down only two cents from last week. So what's giving gas prices this stubbornness? Lucas: The short answer is refineries. Crude oil is the main input, but it's not the only one. Gasoline has to be refined, blended, and transported. And right now, the refining sector is operating at a structural bottleneck. Luna: You're talking about the fact that we haven't built a major new refinery in the U.S. since 1977, right? Marathon's Garyville plant. Lucas: Exactly. And since then we've actually lost capacity. A handful of refineries closed during the pandemic, some converted to renewable diesel. So the ones that remain are running hot, but there's no slack. Any outage — planned maintenance, a fire, a hurricane — and margins spike. Luna: And now we're in the summer driving season. The EPA requires a special summer-blend gasoline that's more expensive to produce. That's not going away even if crude drops ten bucks. Lucas: Right. Summer blend adds somewhere between fifteen and thirty cents a gallon just in compliance costs. And on top of that, the RINs — renewable identification numbers — from the Renewable Fuel Standard add another layer. So the crude price is only part of the story. Luna: Let's talk about the brent wti spread. Brent's been trading above a hundred dollars a barrel, while WTI is in the eighties. That wide spread encourages exports of U.S. crude, which tightens domestic supply. Doesn't that keep gasoline prices higher here? Lucas: It does. Because U.S. refiners are competing with international buyers for the same crude. If a refiner in Louisiana can sell their gasoline into the export market at a premium, they will. That pulls supply away from domestic pumps. So even when WTI falls, the global price floor for gasoline doesn't budge as much. Luna: And the administration isn't doing much about it. The president said no new Strategic Petroleum Reserve releases. The Iran deal talks ended without a final determination. So no new barrels coming online from that direction either. Lucas: Yeah, the headline from yesterday — Trump ends Iran meeting without announcing final determination. That kept the geopolitical risk premium in place for Brent, even as the broader oil complex sold off. And higher Brent means higher import costs for the gasoline we do bring in from abroad, mostly from Europe. Luna: So what you're saying is that even if oil keeps sliding, gasoline might only drift lower. The floor is sticky because of refinery constraints, seasonal specs, and global demand for our refined products. Lucas: Exactly. Look at the crack spread — the difference between the price of crude and the price of gasoline. That spread has widened. Refiners are making more money per barrel of throughput than they were a month ago. That's not because they're gouging; it's because supply of gasoline is tight relative to demand. Luna: And demand is still strong. People are driving. Air travel is near pre-pandemic levels. So the economy is still consuming a lot of refined product, even if the macro data is starting to soften. Lucas: The April CPI came in at 332.4, up from 330.29. Core CPI up too. Inflation is still above the Fed's target. And gasoline is a visible part of that. If you're a consumer, you feel it every week. But the mechanism to lower prices isn't just about oil going down. It's about adding refinery capacity, or blending more ethanol, or relaxing summer specs. None of those are quick fixes. Luna: We should mention that the Energy Information Administration's latest weekly data showed gasoline inventories drawing, not building. So supply is actually tightening a bit. Lucas: Right. Inventories are below the five-year average for this time of year. So even if demand stays flat, any supply hiccup could push prices back up. That's the fragility of the system. Luna: And you've got the summer driving season ahead. Memorial Day was last weekend, and July Fourth is coming. That's peak demand. Lucas: So the disconnect between falling crude and stubborn gas prices isn't a mystery. It's a structural story about a refining system with no buffer, a regulatory calendar that adds cost, and a global market that pulls our supply away. For listeners, the takeaway is: don't expect gas to follow oil down dollar for dollar. It never has, and probably won't this time either. Luna: And if you're following the energy markets closely, the thing to watch isn't just WTI or Brent. It's the gasoline crack spread and refinery utilization rates. Those tell you more about what you'll pay at the pump. Lucas: Exactly. And that kind of deeper understanding — walking through the economy with a little more context — that's exactly what we try to do here every episode. Luna: Yeah, and if that's been valuable to you, we do have a way you can support the show. It's completely voluntary, no pressure. But listener support is what keeps us ad-free. Lucas: Right. So if you've found yourself explaining the crack spread to a friend after listening, or just appreciate having a show that digs into the numbers without the noise, you can support us at buy me a coffee dot com slash fexingo. Luna: And we'll keep doing what we're doing. Now, Lucas, one more thing I want to drill into: the role of renewable fuel credits. You mentioned RINs. How much of that $4.47 is actually RIN compliance? Lucas: It depends on the blender, but estimates put it between 10 and 15 cents a gallon. And those costs are passed through. So even if crude drops, RIN prices can move independently. They've actually been elevated because the EPA hasn't finalized the volume obligations for 2026 yet. That uncertainty adds a premium. Luna: So regulatory uncertainty is another layer on top of everything else. Lucas: Exactly. And that's not going away anytime soon. The administration is in a tough spot: they want lower gas prices, but they also have climate goals. Those goals push for more biofuels and electric vehicles, but that doesn't help the 280 million gasoline-powered cars on the road today. Luna: And the EV transition is happening, but slowly. In the meantime, we're stuck with this brittle gasoline supply chain. Lucas: Right. And that's the core of the episode: oil falls, gas stays high, and it's not an anomaly. It's the system working exactly as it's built. Luna: Alright, that's a good place to leave it. Next episode we'll look at what the natural gas surge — NG up nearly fourteen percent this week — means for electricity prices heading into summer. Lucas: Yeah, that's a big one. Because Henry Hub at 3.29 might not sound high, but it's up sharply, and that flows into power bills. We'll unpack that next time. Luna: Thanks for listening. Lucas: See you next time.