Five Reasons Why Gasoline Prices Go Up At This Time Every Year David BlackmonContributor Energy
Fuel pumps stand at a Marathon Petroleum Corp. gas station in Rushville, Ohio, U.S., on Monday, Jan. 29, 2018. Marathon is scheduled to release earnings figures on February 1. Photographer: Ty Wright/Bloomberg
Well, it's that time of year when we all gripe about rising gasoline prices. This is a ritual that happens every year, and it is even more pronounced this year due to the fact that the price for regular unleaded gas has moved to its highest level in half a decade. While the initial reaction most of us have when we drive up to the gas pump to see the price of regular has risen by ten cents a gallon since the last time we had to fill the tank is to blame it all on a grand conspiracy to gouge the consumer by the nebulous entity we like to refer to as "Big Oil," the truth is that there is a very wellFUTURES AND OPTIONS TRADING INVOLVE SIGNIFICANT RISK OF LOSS AND MAY NOT BE SUITABLE FOR EVERYONE. OPTIONS, CASH AND FUTURES MARKETS ARE SEPARATE AND DISTINCT AND DO NOT NECESSARILY RESPOND IN THE SAME WAY TO SIMILAR MARKETS STIMULUS. A MOVEMENT IN THE CASH MARKET WOULD NOT NECESSARILY MOVE IN TANDEM WITH THE RELATED FUTURES & OPTIONS CONTRACT BEING OFFERED. SEASONAL DEMAND AND CURRENT NEWS IN COMMODITIES ARE ALREADY REFLECTED IN THE PRICE OF THE UNDERLYING FUTURES.
defined and easily-identified set of market- and regulatory-based factors that directly cause the price increase we see each year. Here are five such reasons: •
Higher demand for gasoline - As we come out of winter each year especially a long and severe winter like we just experienced Americans get out of their homes and drive more. This is just a fact of American life. As we drive more we use more gasoline, and higher demand for any commodity tends to result in a higher price for that commodity. This is simple Economics 101.
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Planned Refinery maintenance outages - The refineries that produce gasoline have planned, routine maintenance outages as they emerge from winters (trust me, you want these refineries to be properly maintained), which results in reduced overall refining capacity, causing active refineries to run at higher levels, thus increasing their costs. Higher refining costs in turn create a higher cost for gasoline. Again, simple economic reality.
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Transportation constraints - The ongoing boom in domestic oil production in regions like the Permian Basin in West Texas, the Bakken Shale in North Dakota and the DJ Basin in Eastern Colorado is resulting in transportation constraints, as the build-out of new pipeline capacity lags behind the ramping-up of production. This is resulting this year in higher transportation costs, which in turn adds to the price for gasoline at the pump.
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Higher crude oil prices - As I write this piece on April 19, the price for crude oil has jumped to its highest level since 2014. Given that crude oil is the main feedstock for refining gasoline, any significant increase in crude prices will inevitably result in higher prices at the pump. I detailed the reasons behind the current run-up in crude prices in my previous piece.
FUTURES AND OPTIONS TRADING INVOLVE SIGNIFICANT RISK OF LOSS AND MAY NOT BE SUITABLE FOR EVERYONE. OPTIONS, CASH AND FUTURES MARKETS ARE SEPARATE AND DISTINCT AND DO NOT NECESSARILY RESPOND IN THE SAME WAY TO SIMILAR MARKETS STIMULUS. A MOVEMENT IN THE CASH MARKET WOULD NOT NECESSARILY MOVE IN TANDEM WITH THE RELATED FUTURES & OPTIONS CONTRACT BEING OFFERED. SEASONAL DEMAND AND CURRENT NEWS IN COMMODITIES ARE ALREADY REFLECTED IN THE PRICE OF THE UNDERLYING FUTURES.
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Summer blend gasoline requirements - The Environmental Protection Agency (EPA) regulations designed to control and reduce atmospheric ozone require refiners to produce both "winter blends" and "summer blends" of gasoline. The switch-over from winter blends to summer blends takes place each spring, and the simple fact of the matter is that it is more expensive to produce summer blends than it is to produce winter blends. The ingredients in summer blends cost more, and, due to state and local regulations in several parts of the country, refiners must produce more than 20 different summer blends, which must then be transported to specific regions in specific volumes at specific times, adding higher costs of distribution to the higher costs of production.
Thus, we can blame the EPA for some portion of the higher gasoline price. On the other hand, this policy has been highly successful in mitigating atmospheric ozone and reducing those ugly inversion layers that used to be a fact of daily life in large metropolitan areas around the country. Cleaning up the air costs money, and we've all been paying a part of doing it. As you can see, there really are very good, easily-explained reasons why gasoline prices tend to rise just about the same time each year we all get ready to start planning summer vacations. As much as we'd like to think otherwise, none of them have anything to do with a grand conspiracy by "Big Oil."
FUTURES AND OPTIONS TRADING INVOLVE SIGNIFICANT RISK OF LOSS AND MAY NOT BE SUITABLE FOR EVERYONE. OPTIONS, CASH AND FUTURES MARKETS ARE SEPARATE AND DISTINCT AND DO NOT NECESSARILY RESPOND IN THE SAME WAY TO SIMILAR MARKETS STIMULUS. A MOVEMENT IN THE CASH MARKET WOULD NOT NECESSARILY MOVE IN TANDEM WITH THE RELATED FUTURES & OPTIONS CONTRACT BEING OFFERED. SEASONAL DEMAND AND CURRENT NEWS IN COMMODITIES ARE ALREADY REFLECTED IN THE PRICE OF THE UNDERLYING FUTURES.