Here’s why US gasoline prices haven’t gone down at the pump yet

(Bloomberg) — The more than 48 million Americans traveling by car this Thanksgiving holiday hoping to fill up their tanks for less will be sorely disappointed.

Most Read From Bloomberg

Although a group of major oil consuming countries, including the United States, this week announced a coordinated plan to release crude oil from strategic reserves in order to cut high energy costs, this has not yet translated into lower prices at the pump. The price of regular unleaded gasoline in the United States, which hovers around $3.40 a gallon, is up more than 60% from this time last year, contributing to the high inflation hitting American households as the country begins to recover from the pandemic.

Here are some of the factors that keep gasoline prices high:

Retailers take their time

Crude oil – which is generally the biggest driver of gasoline prices, accounting for about 57% of production costs last month – has fallen for four straight weeks before rising again to start this week. Overall, crude oil futures and gasoline futures are down about 7% from their recent highs. But the retail gasoline prices paid by customers have not followed suit. In fact, the gap between gasoline futures and retail prices widened to $1.20 a gallon last week, the most since 2008, excluding the first part of the pandemic.

This separation made the Biden administration see the color red. Last week, President Joe Biden urged the Federal Trade Commission to investigate possible illegal behavior in US gasoline markets. “I do not accept hard-working Americans paying more for gas because of anti-competitive or potentially illegal behavior,” Biden said in his letter.

When wholesale prices drop rapidly, it provides a window for retail operators to sell at higher prices for a few weeks before lowering prices, said Ernie Barsamian, CEO of Tank Tiger, a tank storage broker. Eventually, pumping prices will come down, but for now, some refineries and gas stations have larger margins, he said.

Street prices can remain constant because consumers are accustomed to paying a higher price and retail operators can browse that price down for one to two months. These periods are a boon for retail operators, Barsamian said, as they can collect a year’s profit in just a few months.

Demand is still high

Supply and demand fundamentals also play a role. More than 53 million Americans are set to travel for the Thanksgiving holiday, with 90% choosing to travel by car, according to AAA. At the same time, gasoline stocks hit their lowest levels in four years. Stocks have fallen to just 211 million barrels in the country, the lowest since November 2017, as supplies can barely keep up with the surge in demand from families eager to travel this year after the 2020 holiday season at closing.

Part of the reason the national average hasn’t dropped significantly includes the fact that we’re less than 24 hours away from one of the busiest travel days of the year. “There’s not much incentive to shoot yourself in the foot,” Patrick DeHaan, head of petroleum analysis at GasBuddy, said in a tweet on Twitter. “Rejections will happen, but it takes time.”

Ethanol is expensive

Some say drivers could see prices fall if refineries are relieved of at least some of their obligations to blend biofuels with gasoline. Most final automobile fuel now sold in the United States contains about 10% ethanol fuel by volume, due to the so-called renewable fuel standard that requires oil refineries and fuel importers to purchase renewable fuels and blend them into the U.S. fuel supply. Ethanol spot prices have doubled this year and are up more than 60% in just the past three months.

Refiners can also meet their stakes by buying tradable credits known as Revolving Identification Numbers (RINs). The cost of these credits, while down from an all-time high after reports that the Environmental Protection Agency is considering lower biofuel targets, remains high due to higher ethanol prices. The industry is still waiting to unveil the delayed blend mandate proposals.

Rising ethanol and RIN prices are seen as a potential factor in increasing the shock attached to the gas pump, but some analysts argue that they are not a major cause. “For most of the pandemic, ethanol is sold at a premium to gasoline,” Benjamin Salisbury, an analyst at Height Capital Markets, said in an interview, noting that it usually sells at a discount. “Maybe add a penny or two to retail prices.”

California distorts the numbers

The national price of gasoline in the United States reported by AAA is average, skewed by higher prices in California. Retail prices in the Golden State jumped to a record $4,705 a gallon as the seasonal demand surge coincides with a series of outages at local refineries, often driven by severe weather. In 2021, the West Coast faced additional supply constraints due to reduced refinery capacity.

“California has a huge impact on the national average with the state having more than 10,000 stations and prices trending up there, but that should reverse soon,” GasBuddy’s DeHaan said in an email. “I think the stations will take their time knowing that millions of Americans are on the road to celebrate Thanksgiving, but I expect the drop to start any day.”

(Updates with additional details in fourth paragraph)

Most Read From Bloomberg Businessweek

© Bloomberg LP 2021

Write a Comment

Your email address will not be published. Required fields are marked *