The Chevron station in Mendocino, California has the most expensive petrol in the US; a gallon of regular unleaded there costs $9.46, and filling up a Ford F-150 there would cost $289. Each gallon of premium costs $9.77. According to AAA, nationwide rates are at a record $4.86 per gallon, with California at $6.34 per gallon and New York City over $5.
The main offender, of course, is the skyrocketing price of crude oil, which for benchmark West Texas Intermediate has increased by $16 a barrel in the past month to reach $119. However, the rise in the price of oil does not fully account for why gas is so much more expensive now than it was in March, when crude oil initially rose above $130 per barrel.
The fundamental law of supply and demand is crucial. At 2.6 billion barrels of oil and petroleum products, which is 300 million barrels less than the five-year average, developed world stockpiles are currently at seven-year lows. According to the Energy Information Administration, gas stockpiles in the United States have decreased from 246 million barrels at the end of February to 219 million barrels last week. When combined with the loss of millions of barrels per day of Russian supplies owing to sanctions, there is incredibly little supply cushion to meet the rampant demand for fuels. Refineries and oil firms are pumping at maximum capacity.
Only 1% of American gas stations are owned by companies that also produce oil, according to the Dallas Federal Reserve, and to obtain their wholesale supply they are dependent on refineries, which act as the link between crude oil extracted from the ground and refined gasoline that can actually be pumped into cars. In March 2022, 59% of the cost of ordinary gasoline came from crude oil, but 18% came from refining expenditures, a portion that rises during local disturbances. Pricing may be localized. Despite prices fell across the majority of the nation as crude oil prices declined, California and Arizona experienced price increases when a California refinery had to close due to power disruptions in March.
“Theoretically you could have oil be $1 a barrel and gas could be $10 a gallon if there’s only one tiny refinery in the country operating,” says GasBuddy’s head of petroleum analysis, Patrick de Haan. “Oil is not at what it was in March when it hit $135, but what has changed is that gasoline inventories have continued to decline.”
As more people travel during the spring and summer, stockpiles typically decrease. However, because Russia isn’t providing any more supplies, refiners are now asking higher prices. The “crack spread,” which is used by American refiners to gauge their gross profitability, is simply the difference between the price they pay per barrel of crude oil and the premium they can charge for the blend of jet fuel, diesel, and gasoline that their plants “crack” the crude hydrocarbon molecules into. Business is booming for these companies. Crack spreads at the Midwest refiner HF Sinclair, which is owned by the wealthy Holding family and was recently formed by the merging of HollyFrontier and Sinclair Refining, nearly doubled from the first quarter to the second. Refiners’ profit increased by 50% to roughly $1 for every gallon of gasoline sold in April.
Retail gas stations pass along these increased prices to customers, and despite falling oil prices, they frequently lack the competitive pressure to reduce prices too quickly. According to popular wisdom, gas prices rise quickly and fall quickly, according to the Dallas Fed.
“When the price of gasoline goes up, people are very good about going out and trying to find another gas station which is perhaps not quite as expensive,” explains Lutz Kilian, senior economic policy adviser at the Dallas Fed. “If you look at price declines, there’s evidence that people are not going out quite as much to look for an even less expensive gas station, and that gives additional market power to retail gas stations.”
The magnitude of the energy market’s volatility this year is another reason giving retail gas operators pause before decreasing rates. The unpredictability brought on by Russia’s incursion and the sanctions imposed on Putin’s government has been like a roller coaster. Retailers of gasoline must protect themselves from that volatility, and many are still recovering margins from when they were late to respond to the initial March surge.
“We’ve literally seen a couple of days where the wholesale price of diesel goes up by 75 cents a gallon in one fell swoop,” De Haan declares. “If you’re selling thousands of gallons a day, that’s a huge amount of exposure. Stations are going to be reluctant to immediately lower prices 20 cents when they just lost 75 cents times 3,000 gallons in a day.”
These behavioral disruptions tend to lose relevance over longer time frames, such as monthly or quarterly intervals, as crude oil prices influence the market. However, that option isn’t particularly appealing either, given that experts believe that, barring a severe recession, oil prices may soon reach $200 per barrel.
Why not purchase shares in a refiner or petrol station if you believe they are currently generating too much money? American refiners Valero Energy and Marathon Petroleum are predicted by Credit Suisse analyst Manav Gupta to have record second-quarter profits. Even though both equities have already increased by more than 65% this year, they are still pricing at about 11 times projected 2022 earnings. A divisive proposed windfall profits tax that would reduce these gains may get greater traction in Congress the longer high prices persist, but beware, high prices eventually stabilize themselves.