High U.S. Gasoline Prices – Consumer Optimism or Otherwise?

The January retail price of gasoline broke records, averaging US $3.37 a gallon, according to the Oil Price Information Service. This price compares with the previous record average for the month of US $3.095 a gallon, set last year and a much lower US $2.71 in January of 2010.  January is typically a month of weaker prices around the nation, as fuel demand drops post year-end holiday travel. Yet many, including the Los Angeles Times, blame the rising prices on a stronger economy and the resulting increased demand for fuel. This is not the case.

Current higher prices at the pump have more to do with the refining industry than demand factor, as lack of refinery capacity had a major upward influence on prices. As refining margins (crack spreads) plummeted during the end of 2011 and into 2012, refineries closed, not only in the US but overseas. Oil prices have been elevated for months while the spike in gasoline prices is a more recent phenomenon (see graph above). Crude oil supplies are plentiful as North America is producing more than ever and landlocked Cushing, Oklahoma is well supplied.  Yet the January 27th supply of finished motor gasoline, according to the EIA, was about ten percent down from the same time last year. Furthermore, the weekly U.S. refiner net production of finished motor gasoline was down over 14% from the end of November 2011. True, the price of crude oil, gasoline’s largest cost input, has been rising due to tight overseas supplies and tensions from Iran, however this phenomenon has been evident since Q3 2011 if not earlier, whereas the rise in the price of gasoline, from a relative standpoint, is more recent.