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Robert Rapier

Robert Rapier

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Why Gasoline Prices Will Continue To Rise

This past week the national average price for regular gasoline rose to $2.71 per gallon. That marks an increase of $0.46/gallon since the beginning of the year. 

On a daily basis I see accusations on social media that this price rise is a consequence of Joe Biden winning the presidential election. I am going to explain why this is ludicrous, but I would pose the following to those who believe this to be the case.   

(I feel the need to insert a caveat here, because many people don’t seem to make it past this point before stamping their feet and sending me hate mail. I am not saying his policies will never impact gasoline prices. I am saying that there hasn’t been time for them to yet, and we have good explanations for why prices have risen).   

Since Biden’s inauguration, daily Covid-19 cases have fallen by two-thirds. Daily deaths are down by nearly half. Is Joe Biden responsible for this? If you say “No”, or you feel the need to hedge or qualify your answer, then you probably realize that cause and effect isn’t quite as simple as that. The same holds true for gasoline prices.

The main reason I can say that Biden isn’t responsible for the rise in gasoline prices is that we understand pretty well why those prices are rising. Those reasons (mostly) have nothing to do with him.  

Factor 1: Rising Oil Prices

The single biggest factor influencing changes in gasoline prices is almost always underlying changes in the price of oil. Show me a time that gasoline prices spiked or plunged, and the vast majority of the time you will find that oil followed the same pattern.

On the first trading day of January 2021, the price of West Texas Intermediate (WTI) closed at $47.47 per barrel (bbl). Two months later, on the first trading day of March, the price closed at $60.54/bbl. During the time gasoline prices rose by $0.46/gallon, the price of oil rose by $0.31/gallon.

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But gasoline prices often lag oil prices. In the past six months, the price of oil has risen by $0.56/gallon, while the price of gasoline is up $0.50/gallon. In other words, the vast majority of the gasoline price rise can be accounted for by the rise in the price of oil.

I will explain other factors influencing the price of gasoline below, but why are oil prices rising? Is Biden responsible for that?

The are two factors that have driven up the price of oil. One is that demand collapsed last year as pandemic measures were implemented and people stopped traveling. The price of oil plummeted. That, in turn, ended up idling 3 million barrels per day (BPD) of U.S. oil production relative to a year ago.

As the end of the pandemic nears, oil demand is bouncing back. Supply doesn’t respond as quickly, and therefore that puts pressure on prices. If you think Biden is responsible for hastening the end of the pandemic, then you can place some blame for the rise in oil prices on him. But that’s because the economy is beginning to recover, which is a good thing.

Second, unlike a year ago, OPEC and Russia recently decided to cooperate by extending most of the current output cuts. Despite some recovery in demand, Saudi Arabia kept in place a 1 million BPD cut. That decision sent oil prices sharply higher, and will likely ensure additional gains in gasoline prices.

Vitol Group, the world’s largest independent oil trading house, pointed the finger directly at OPEC. Mike Muller, head of Vitol’s Asia division, said “The market is telling us that OPEC+ have control. We’re going to get a stock-draw that is going to accelerate through the second quarter and that’s why the market is doing what it’s doing.”

Factor 2: Loss of Refining Capacity

Beyond oil prices, what other factors can impact gasoline prices? One of the most significant is any event that limits refinery capacity. If the crude oil can’t get refined, then gasoline supplies will start to run low. That, in turn, will cause gasoline prices to rise. This often happens when a hurricane is churning through the Gulf of Mexico, but it also happened last month when the winter storm swept through Texas.

During the first two weeks of February, refinery utilization in the U.S. was at 83%. Then the winter storm negatively impacted about a dozen refineries in Texas. By the last week of February, refinery utilization had plunged to 56%. Once again, it’s hard to pin that on Biden. Related: Oil Trader Mercuria Gets Painted Bricks, Not Copper In $36 Million Scam

There are only a couple of mechanisms by which a President could have a short-term impact on gasoline prices. If they signed legislation changing the gasoline tax, which currently accounts for about 21% of the cost of gasoline, then that would quickly impact gasoline prices. Or, if a President announced a major release of oil from the Strategic Petroleum Reserve, that could cause oil prices to temporarily dip and might impact gasoline prices short-term.

Longer term, there are certainly things Biden can do to impact gasoline prices. Some of the moves he is making now may eventually impact prices. Cancellation of the Keystone XL Pipeline, for example, could eventually impact gasoline prices.

But those are long-term impacts. Other than the two mechanisms I mentioned above (or, I suppose he could also escalate military action in the Middle East), a President just doesn’t have a mechanism for sharply moving gasoline prices.

Factor 3: Transition to Summer Gasoline

Where are prices headed from here? Undoubtedly higher. One final fact that impacts gasoline prices is whether the U.S. is in winter or summer gasoline season. Winter gasoline blends are cheaper to produce, and demand is lower.

By summer, gasoline blends cost more to produce and demand is higher. Hence, the price of gasoline typically rises between January and May. Last year was a notable exception caused by the pandemic, but higher gasoline prices headed into summer is the norm.

By Robert Rapier for Oilprice.com

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Leave a comment
  • Andrew Babey on March 10 2021 said:
    I do not disagree on what I read here but I think what was left out was the halt on permits on federal lands, in the short term yes this will cause no impact, most already have permits, but there is so much speculation in the oil market and this action set a tone for how this administration might view oil and gas and that has been priced in to future/current oil prices
  • Justin Mayet on March 10 2021 said:
    From first glance of reading your article I believe you left out 4 points that can influence prices. I recommend updating the article to reflect that. And other than the two things I’ll mention. I thought the article was well done from a neutral unbiased standpoint.

    The US dollar gaining value or dropping in value can influence oil prices.
    A large stimulus package can influence prices.
    Large shifts in US rig count and weekly US production.
    Large shifts in storage at Cushing Oklahoma.

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