The rise in gas prices sparks all kinds of conversations about $4 a gallon, $5 a gallon, $200 oil and all sorts of other things. We’ve heard about such things for years and no one is surprised to see those kinds of headlines anymore. While it is true that the economy is recovering and that could conceptually cause some supply squeezes, aggregate gasoline demand has been down over the last year, and compared to the boom years. So maybe it isn’t consumer demand.
There’s the big Iranian and Syrian issues which would explain it. And that could drive speculators back into oil markets, a place they’ve been before. There isn’t proof there but it’s likely a player in the game.
But it’s not so simple as all that. We like to think that with all the oil production in the world we should have no issues getting gas into our tanks. After all, there’s a gas station on every corner, we see tanker trucks everywhere on the roads. But getting oil out of the ground and turning it into gas is a process no one really talks about. They’re called refiners, and some of them can’t make a profit.
On the east coast there are only a few large refineries and they are in danger of being shut down. Being squeezed between oil giants and price sensitive consumers, they aren’t as able to pass on price increases as you might think. This has left them in a hole for some time and the current owners have some of these facilities listed for sale. If they can’t find a buyer, they’ll shut them down. Sunoco shut a large one down in New Jersey in 2010.
If more shut down there will be a supply shortage on the east coast. The northeast would feel it the most, but everyone will feel something. Wholesalers will look to the production in Texas and on the west coast to help meet demand, but that gas has to be shipped across the country, and that will add to the cost 5-10 cents per gallon. That increase doesn’t account for price adjustments related to supply not meeting demand, just shipping costs.
Summer almost always brings higher prices too due to a fuel additive that makes the gas cleaner in hot months. This is known as summer-grade fuel. We could be looking at a pricey summer.
More affordable gas is not something easily done. It’s not as simple as a promise from a presidential candidate. It’s not as simple as removing speculators. It’s a balancing act of geopolitics, demand, production, supply, the economy, fuel economy, refining, and even the weather. There’s never one explanation for a move, and never an easy fix.